London Borough of Sutton Pension Fund Page 29 2019 valuation - PowerPoint PPT Presentation

London Borough of Sutton Pension Fund Page 29 2019 valuation initial results and assumptions Agenda Item 10 Melanie Durrant FIA CERA, Principal Julie Baillie FFA, Actuary 19 November 2019

Executive summary – key questions Strategic support Agenda Item 10 • When should we What are the initial • review our results and indicative investment strategy? contribution rates ? Page 30 • What’s next? How do we communicate • How do the results to our assumptions fit employers?e together? • What documentation ! do we need to • How do we manage consider? (Valuation all the risks including documents and FSS, regulatory risks ISS..) (McCloud) LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 2

Page 31 Agenda Item 10 Assumptions

Our key assumptions Agenda Item 10 Discount Mortality rate Page 32 Financial Demographic Pension Salary increases Retirement Commutation increases (CPI) LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 4

RPI Inflation 3.3% BoE 20 Year Inflation Curve 4.0% CPI = 2.4% 2016 3.8% 3.6% Page 33 3.4% 3.6% Smoothed CPI = 2.6% Spot 3.2% Source: Bank of England 2019 Agenda Item 10 3.0% Mar 16 Jun 16 Sep 16 Jun 17 Sep 17 Mar 18 Jun 18 Sep 18 Mar 19 Dec 16 Mar 17 Dec 17 Dec 18 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 5

Discount rate – BW economic model Agenda Item 10 Weighted expected future investment • returns from long-term investment strategy (top down approach) Assumptions assessed over six month • period spanning valuation date Page 34 (smoothed) Specifically designed for LGPS • Smoothed returns help stability • Expenses allowance included here • rather than primary rate LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 6

Discount rate – prudence allowance 0.7% Employer Attitude to covenant risk 2016 Page 35 Allowance Investment for 0.7% strategy uncertainties 2019 Prudence Agenda Item 10 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 7

Discount rate – combining returns Agenda Item 10 5.2% Neutral assumption Asset class 2019 allocation (p.a.) 2016 Equities 50.0% 6.7% Gilts 6.0% 1.7% Property and infrastructure 15.0% 6.1% Pooled multi asset fund 24.0% 3.8% Page 36 4.7% Private debt 5.0% 6.7% Less expenses 0.2% 2019 Neutral return 5.4% Less prudence adj. 0.7% 4.6 Prudent discount rate 4.7% 2.1% real assumption discount % Relative to CPI 2.1% rate LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 8

Key assumptions: mortality 2016 valuation Base mortality assumptions • Adjusted CMI CMI_2015 What is our best estimate of the • “S2” tables projections mortality of the membership today? Page 37 Future changes in mortality • How do we expect the current • experience to change in future? 2019 valuation Necessarily uncertain! • Agenda Item 10 Adjusted CMI CMI_2018 “S3” tables projections LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 9

Longevity experience Agenda Item 10 Page 38 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 10

Key assumptions - summary Assumption 2019 2016 Effect CPI inflation 2.6% p.a. 2.4% p.a. Salary increases 3.6% p.a. 3.9% p.a. Discount rate 4.7% p.a. 5.2% p.a. Page 39 Mortality base tables 110/105% rating S3 80/85% rating S2 tables tables Improvement model CMI 2018 CMI 2015 Long-term rate of imp 1.25% p.a. 1.5% p.a. Agenda Item 10 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 11

Page 40 Agenda Item 10 Initial results

Assets Market value at 31 March 2019 = £664m • Change in Asset Values 150 Year Annual Asset projection based on 2016 return 140 valuation assumption 2016/17 20.9% 130 Page 41 Equities 120 2017/18 3.1% 110 Gilts 2018/19 7.4% 100 Agenda Item 10 Average 10.2% 90 Actual assets LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 13

Summary - whole Fund results Agenda Item 10 Proposed basis Previous valuation Past service funding position 31 March 2019 31 March 2016 80% £m £m Smoothed asset value 661 503 2016 Past service liabilities Actives 216 194 Page 42 Deferred pensioners 163 140 Pensioners 353 298 Total Liabilities 732 632 Surplus (Deficit) -71 -129 90% Funding level 90% 80% Key takeaway 2019 • Overall improvement in position since 2016 • Allow for legislative uncertainty (McCloud) LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 14

Summary - whole Fund results (contributions) Proposed basis Previous valuation 17.2 % Primary rate 31 March 2019 31 March 2016 % of payroll p.a. % of payroll p.a. 2016 Average total future service rate 25.8% 23.7% Less average member rate -6.6% -6.5% Fund primary rate 19.2% 17.2% Page 43 Key takeaways 19.2% • Will vary by employer 2019 • Increase in primary rate Agenda Item 10 • Secondary rate not included • Overall aiming for stability of total level of contributions LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 15

Reconciliation - whole Fund results Agenda Item 10 Page 44 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 16

Reconciliation – primary contribution rate 0% Page 45 Agenda Item 10 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 17

Page 46 Agenda Item 10 Next steps

2019 valuation timetable – key milestones Spring 2019 Data gathering by administering authority Timetable agreed, BW meet with Fund (member data and cashflows) Summer 2019 All data sent to BW BW complete data checks Audited asset information available Autumn 2019 Page 47 Agree assumptions with Initial results and detailed BW complete initial calculations administering authority assumptions paper Winter 2019/2020 Employer results prepared 4 December meeting to discuss/present employers’ rates Agenda Item 10 March 2020 Results finalised & valuation report Contributions start 1 April New FSS and ISS in place signed off 2020 LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 19

Next steps – individual employer results Agenda Item 10 • Review existing contributions and recovery plan • Recovery plan length • Avoid extending recovery plans Page 48 • Retain 2035 target date • Managing increases Step up if required (watch out for s13) • • Consider results of covenant analysis report • More now means less later and less overall LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 20

Funding Strategy Statement Page 49 Agenda Item 10

Risk management Agenda Item 10 Funding strategy Page 50 Investment Covenant Strategy LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 22

Review Funding Strategy Statement Review funding policies as determined by administering authority • Employer pooling • Academies • Orphan employers • Cessation policy (consider exit credits) • Policy on ill health retirements • Page 51 Policy on early retirement strain payments • Treatment of new admission bodies/outsourcings • Treatment of McCloud judgement in valuation • Different approaches possible by employer type Agenda Item 10 • Doubled number of academies/free schools (22 academies at 2016) • Only 6 new admission bodies…and 3 ceased employers • LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 23

Covenant assessment Agenda Item 10 Employer’s ability to meet pension fund commitments Qualitative assessment Quantitative assessment Specialist advice • Categorise at high level • Pension fund metrics • Detailed analysis by experts Page 52 • Agree risk factors • D&B risk score • Outlook for sector • Assess employer profile • Total Risk score Benefits Develop risk framework to inform funding strategy • Identify and address most risky employers • Obtain guarantee / security • Evidence good governance • LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 24

Employer experience Ill-health strain Early retirement High salary costs cost increases • Require payment • Strain cost met • Monitor annually of strain cost by employer • Charge cost Page 53 • Pooling • Immediate resulting from excess increases • Self-insurance • Spread over short period • External insurance Agenda Item 10 Risk of employer decisions / member experience leading to increased liabilities LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 25

Key takeaways Agenda Item 10 Financial Funding Contributions assumptions position 4.7% discount rate 19.2% primary rate. Funding position Page 54 and lower salary Secondary rates to improved from 80% increase follow. to 90% assumption Risk Demographic Regulatory management assumptions uncertainty Self insurance, McCloud, valuation Members living not employer covenant, cycles, Section 13 as long as investment strategy previously thought LONDON BOROUGH OF SUTTON PENSION FUND – 2019 INITIAL RESULTS 26