London Borough of Harrow Pension Fund 2016 Valuation: Funding strategy considerations Gemma Sefton 9 March 2016 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
What are we going to cover? Actuarial valuation basics Valuing the Fund Recap of 2013 valuation funding strategy Developments for 2016 valuation 2
Intro to the valuation
Why do we do a valuation? Compliance with legislation Set employer contribution rates Determine money needed to meet accrued liabilities Calculate solvency (“funding level”) Monitor experience vs. assumptions Manage risks to Fund and employers Review the Funding Strategy Statement (FSS) 4
The Fund’s ultimate objective St ructur e 60 Pension Amounts (£) Millions Managers 50 Pensioners 40 Deferred Pensioners 30 Actives 20 10 0 1 9 17 25 33 41 49 57 65 73 81 89 97 Year Pay members’ benefits Source: London Borough of Harrow Pension Fund 2013 formal valuation cashflows 5
How the fund works Investment income/growth** £90m Employer contributions Pensions Lump sums Employee contributions Transfers in Transfers out £29m £34m Expenses* * Investments and administration £1m ** Income and growth Source: LB Harrow Pension Fund Annual Report and Accounts 2014/15 6
Promise now, pay later: Long term pension promise in ever-changing environment Lump Sum Expenditure Member’s Dependant’s Pension Pension Contributions Income 40 65 85 Death Retirement Recruitment 7
Scheme benefits – the building blocks Final pay in last year Period of Accrual Scheme rates Membership Basic pay/salary Pre-2008 Time in the LGPS 1/80th Extras – bonus, overtime, benefits in kind Post-2008 Transferred in 1/60th Pay during each year Bought by the Post-2014 member 1/49th Basic pay/salary Awarded by the employer Extras – bonus, Overtime, benefits in kind 8
Overview of a valuation Actual cost of a Scheme will depend on the pensions actually paid A valuation is an estimate of how much money will be needed to pay the pensions Estimate is based on assumptions about amounts of benefit payments probability of benefits being paid 9
The actuarial valuation: interested parties Councils/Taxpayers want employees’ benefits suitably Pension Committee funded, with minimal impact on formally decides on appropriate Council services, and minimal balance between prudent funding Employers inter-generation cross-subsidies of Members’ benefits and wish affordable, stable contributions affordable contributions which which pay for their are consistent across all Employers employees’ benefits and are consistent with other Actuary employers Local Pension Board carries out oversees process, assists valuation Pension Committee where necessary Fund members must have their benefits paid in full. Want to see their Fund run Officers well: look to Officers, Committee liaise closely with Actuary and and Local Pension Board other advisers, Pensions Investment adviser Committee, and Employers considers valuation projections relative to Fund’s investment strategy 10
Valuation timeline Early 2016 Funding strategy discussions and May – July 2016 valuation planning. Data submitted and whole fund calculations processed. [ Send draft results to National Scheme Advisory Board by 30/9 ] July 2016 Initial results and assumptions discussed and agreed with Fund. August 2016 Individual employer results calculated. September - December 2016 Employer results and funding strategies February 2017 agreed in principle. End of employer consultation. Employer forum and surgeries held. Final employer results and FSS agreed. March 2017 Final valuation report signed off by 31 March 2017. 11
Valuing the Fund
Liability valuation - assumptions Amounts paid and probability of payment Financial assumptions : Demographic assumptions: • Investment return • Life expectancy • Inflation • Retirement age and cause • Pay increases • Withdrawals • Pension increases • Marriage statistics Consider: Consider: Economic outlook Population trends Actual scheme assets Members’ social status Historical pay growth Past scheme experience 13
Granularity of Fund membership High life expectancy Mid life expectancy Low life expectancy 14
Each Fund is different High life expectancy Mid life expectancy Low life expectancy Source: Club Vita research based on VitaBank as at January 2012 15
Traditionally: funding plans based on single expectation of the future Actuary & Fund Actuary agree one set of calculates assumptions contribution rates 110% 100% Funding level 90% 80% 70% Funding progression 80% growth strategy 60% 50% Year 16
Recap of 2013 approach
LB Harrow Pension Fund approach Measurement and management of funding position Measure : Manage: Assets and liabilities Balance affordability and valued using market risk conditions Recognise risk posed by Ensure transparency and different employers consistency Consider term of Understand deficit participation Appreciation of risk Consider different future outcomes for market conditions 18
LB Harrow Pension Fund: risk based approach to setting council contribution strategy Best outcomes 200% 99% 180% 95% 160% 140% 84% Funding level 120% median 100% 80% 16% 60% 5% 40% Tail Value 20% 1% at 0% Worst outcomes Risk 0 1 2 3 4 5 6 7 8 9 10 Years from now Assess the likelihood of different outcomes 19
5,000 scenarios gives a distribution of outcomes 200% 175% 1 in 6 chance 150% Funding Level (%) 125% Median 100% 75% 1 in 6 chance 50% 25% 0% 0 3 6 9 12 15 18 Years from valuation date More than 50% chance meet funding objective Source: Hymans Robertson LLP, comPASS, sample output 20
LB Harrow Pension Fund: understanding future risks Ideally want the bars and the points to be as high as possible Source: Hymans Robertson LLP, comPASS, LB Harrow modelling (2013) 21
LB Harrow Pension Fund: understanding the trade offs Prudence Stewardship Affordability CONTRIBUTION STRATEGY LONG TERM AVERAGE OF THE HIGHEST MEDIAN MEDIAN FUNDING LEVEL IN LIKELIHOOD OF WORST 5% OF FUNDING CONTS DURING THE 22 YEARS SUCCESS LEVELS IN 2035 NEXT 22 YEARS Strategy 1 78% 39% 170% 20.7% Strategy 2 77% 55% 146% 27.0% Strategy 3 63% 45% 120% 20.7% Strategy 4 50% 47% 105% 21.7% Strategy 5 70% 50% 163% 20.5% Strategy 6 77% 52% 161% 22.7% Source: Hymans Robertson LLP, comPASS, sample output 22
2013 contribution rate strategies Type of employer Scheduled Bodies Community Admission Bodies and Transferee Admission Bodies Designating Employers Sub-type Council Pool Academies Open to new entrants Closed to new entrants (all) Ongoing, assumes long-term Fund participation (see Ongoing, but may move to Ongoing, but may move to Ongoing, assumes fixed contract term in the Basis used Appendix E) “gilts basis” - see Note (a) “gilts basis” - see Note (a) Fund (see Appendix E) Projected Unit Credit approach (see Appendix D – D.2) Projected Unit Credit Attained Age approach Projected Unit Credit approach if open, Attained Future service rate approach if open (see (see Appendix D – D.2) Age otherwise (see Appendix D – D.2) Appendix D – D.2) Yes - see Note (b) Yes - see Note (b) No No No Stabilised rate? Maximum deficit 20 years 20 years 15 years – subject to 15 years – subject to Outstanding contract term recovery period – Note security / covenant check security / covenant check (c) Deficit recovery Monetary amount Monetary amount Monetary amount Monetary amount Monetary amount payments – Note (d) Covered by stabilisation Covered by stabilisation Preferred approach: contributions kept at future service Reduce contributions by spreading the surplus Treatment of surplus arrangement arrangement rate. However, reductions may be permitted by the over the remaining contract term Administering Authority Covered by stabilisation Covered by stabilisation None None None Phasing of arrangement arrangement contribution changes Administering Authority reserves the right to review contribution rates and amounts, and the level of security Particularly reviewed in last 3 years of contract Review of rates – Note provided, at regular intervals between valuations (f) n/a Note (g) Note (h) Notes (h) & (i) New employer Cessation is assumed not to be generally possible, as Can be ceased subject to terms of admission Participation is assumed to expire at the end of Cessation of Scheduled Bodies are legally obliged to participate in the agreement. Cessation debt will be calculated on a the contract. Cessation debt (if any) calculated participation: LGPS. In the rare event of cessation occurring (machinery basis appropriate to the circumstances of cessation – on ongoing basis. Awarding Authority will be of Government changes for example), the cessation debt see Note (j). liable for future deficits and contributions arising. cessation debt payable principles applied would be as per Note (j). 23
Development of 2016 strategy
3 step approach to setting funding plans What is our funding target? How long do we want to give ourselves to get to the target? How sure do we want to be that we hit the target? 25
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