London Borough of Sutton Pension Fund Page 11 Actuarial valuation as at 31 March 2019 Agenda Item 5 Melanie Durrant, Associate & Actuary Julie Baillie, Actuary 4 June 2019
Agenda Item 5 Agenda Actuarial valuations – background • Page 12 Assets • Liabilities • Assumptions – financial – Assumptions – non-financial – 2019 Valuation – what to expect? • Questions and comments •
What do we do? • Future benefits • Accumulation of paid from the contributions and Liabilities Assets Fund (pensions, investment returns lump sums etc) less benefits paid • How much do we Page 13 need now to pay • How much are they Valuation Valuation future benefits? worth? (Contribution rate) Value of liabilities less Agenda Item 5 Deficit value of assets Value of assets / value of Funding Level liabilities London Borough of Sutton Pension Fund – June 2019 Committee Meeting 3
Types of valuations Agenda Item 5 • Funding level / deficit and set contribution rates Funding valuations • New academies / new admission bodies Accounting • Brought in to help stakeholders compare Page 14 valuations (FRS/IAS) liabilities of companies • Regulation 64 Cessation valuations • Determine exit payment / credit • How much money needs to be paid between Bulk transfers Funds in respect of external member transfers? London Borough of Sutton Pension Fund – June 2019 Committee Meeting 4
Triennial valuations – why do we do them • to certify levels of employer contributions to Set out in LGPS secure the solvency of the Fund and the Regulations long term cost efficiency of the Scheme Have regard to the • As determined by administering authority Funding Strategy • With some actuarial help! Statement Page 15 • Function of Funding Model / investment Stability of strategy contributions • Spreading and stepping Agenda Item 5 Different approaches • Statutory/non statutory bodies possible for different • Open or closed admission agreements employer types • Employer financial strength (covenant) London Borough of Sutton Pension Fund – June 2019 Committee Meeting 5
Valuing employer assets Agenda Item 5 Begin with assets at start of period Increased by contributions paid in Reduced by benefits paid out Page 16 With an additional gain or loss from Fund investment returns London Borough of Sutton Pension Fund – June 2019 Committee Meeting 6
What do we do? - Liabilities Assess long term financial risks Assess the probability of benefits being paid Estimate and value future benefit payments Page 17 Need to apply many different assumptions Agenda Item 5 How much do we need to pay in advance to afford all these benefit payments? London Borough of Sutton Pension Fund – June 2019 Committee Meeting 7
How do liabilities change over time? Agenda Item 5 Page 18 London Borough of Sutton Pension Fund – June 2019 Committee Meeting 8
First project the cashflows… Step 1 Step 2 • Projection of all possible • Attach probabilities to each benefit payments for each possible payment to get member “expected” payments Fund cashflows Page 19 Pensioners Deferred Actives Agenda Item 5 2016 2026 2036 2046 2056 2066 2076 2086 2096 2106 Year London Borough of Sutton Pension Fund – June 2019 Committee Meeting 9
Then you “discount” them back to the valuation date… Agenda Item 5 Step 1 Step 2 Step 3 • Projection of all possible • Attach probabilities to each • Discount “expected” benefit payments for each possible payment to get payments” to present day value member “expected” payments Page 20 Fund discounted cashflows Pensioners Deferred Actives 2016 2026 2036 2046 2056 2066 2076 2086 2096 2106 Year London Borough of Sutton Pension Fund – June 2019 Committee Meeting 10
Our key assumptions Discount Mortality rate Page 21 Financial Demographic Pension Salary increases Retirement Commutation increases Agenda Item 5 (CPI) London Borough of Sutton Pension Fund – June 2019 Committee Meeting 11
Discount rate – BW economic model (2016 valuation) Agenda Item 5 Weighted expected future • investment returns from long- term investment strategy (top down approach) Page 22 Assumptions assessed over six • month period spanning valuation date (smoothed) Specifically designed for LGPS • Smoothed returns help stability • London Borough of Sutton Pension Fund – June 2019 Committee Meeting 12
Real discount rate Page 23 Agenda Item 5 London Borough of Sutton Pension Fund – June 2019 Committee Meeting 13
Key assumptions: inflation Agenda Item 5 Key factors to consider when establishing an inflation ■ assumption: Yields on fixed and index-linked gilts ‒ Inflation expectations (Bank of England) ‒ RPI or CPI? ‒ Page 24 Government policy ‒ Inflation rate Liabilities (up) (up) London Borough of Sutton Pension Fund – June 2019 Committee Meeting 14
Key assumptions: mortality What is longevity risk? ■ Key factors to consider when establishing a mortality assumption: ■ Population/ industry experience ‒ CMI studies ‒ Scheme experience ‒ ‒ Social class ‒ Pension size ‒ Health Page 25 ‒ Postcode Life Liabilities (up) expectancy Agenda Item 5 (up ) London Borough of Sutton Pension Fund – June 2019 Committee Meeting 15
Effect of assumptions Agenda Item 5 Page 26 London Borough of Sutton Pension Fund – June 2019 Committee Meeting 16
Longevity experience – average fund Page 27 Agenda Item 5 Reducing cost by around 3% relative to 2016 London Borough of Sutton Pension Fund – June 2019 Committee Meeting 17
What is the key outcome? - Contributions Agenda Item 5 Future service contribution rate / Primary rate • Cost of next year’s pension earned • Employer’s share of cost Page 28 Past service contribution rate / Secondary rate • Adjustment to primary rate to get the required employer rate • Contribution towards deficit (cash sum or % of pay) Total contribution rate Primary rate + secondary rate London Borough of Sutton Pension Fund – June 2019 Committee Meeting 18
Funding position – then and now(ish) 31 Mar 2016 31 Dec 2018 £m £m • Estimate position at 31 Smoothed asset value 503 641 Dec 2018 Past service liabilities • Basis consistent with Interim Actives 194 206 2016 valuation Deferreds 140 155 monitoring • Improved funding Pensioners 298 342 position… Total 632 703 Page 29 Surplus (Deficit) (129) (62) Funding level 80% 91% 2019 • However…. Agenda Item 5 • Consider increased prudence in basis valuation • Lots of legislative uncertainty • External influences London Borough of Sutton Pension Fund – June 2019 Committee Meeting 19
Looking ahead in 2019 Agenda Item 5 We can’t provide an indication of results at this stage • Funding model and assumptions to be discussed/reviewed with the Fund • Employer circumstances different from Fund as a whole What we know • Returns have been really good (although setback in Q4 2018) • Lower expected returns (above inflation) going forward Page 30 • Life expectancy increasing less quickly than previously expected What we know that we don’t know • Changes to assumptions – discount rate in particular • Individual employer experience • Individual funding strategy and discussions •Won’t know until individual results available in October/November 2019 What we don’t know that we don’t know… • Usually to do with Government • Cost cap management process • McCloud judgement on transitional protections London Borough of Sutton Pension Fund – June 2019 Committee Meeting 20
2019 valuation timetable – key milestones Spring 2019 Timetable agreed, BW meet with Fund Data gathering by LB Sutton (member data and cashflows) Summer 2019 All data sent to BW BW complete initial calculations Audited asset information available Autumn 2019 Page 31 Agree assumptions with LB Sutton Initial results and detailed assumptions paper Winter 2019/2020 Employer results prepared LB Sutton discuss rates with employers Agenda Item 5 March 2020 Results finalised & valuation report signed off New FSS and ISS in place Contributions start 1 April 2020 London Borough of Sutton Pension Fund – June 2019 Committee Meeting 21
Current issues (valuation related) Agenda Item 5 Quadrennial Academy valuations Section 13 review Page 32 McCloud/ Tier 3 Cost cap tPR data employer management review of requirements transitional review protections Keep an eye on our website www.barnett-waddingham.co.uk London Borough of Sutton Pension Fund – June 2019 Committee Meeting 22
Page 33 Agenda Item 5 QUESTIONS
Agenda Item 5 Background Page 34 information
Section 13 An independent review by the Government Actuary’s Department of local LGPS funding valuations and employer contribution rates Funds can still have their own bespoke funding plan • Funding model / assumptions / recovery period etc. • But need to keep an eye on s13 valuation • Avoid being summoned to the headmaster’s office… • Page 35 Will be an issue for some Funds/employers re affordability / stability of contribution • Good results for London Borough of Sutton at 2016 Agenda Item 5 All green! • London Borough of Sutton Pension Fund – June 2019 Committee Meeting 25
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