Norfolk Pension Fund Preparation for 2010 valuation Employer Forum, 2 March 2010 John Wright 2 March 2010 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
Your presenter today John Wright, Partner Head of Public Sector Consulting john.wright@hymans.co.uk 0141 566 7921 2
What we will cover today 1. Introduction: some basics 2. Update to end January 2010 3. Why individual employer results are different 4. Setting contributions 5. Outlook for March 2010 FRS17 6. LGPS Topical Issues 3
1. Introduction: some basics Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
Features of the LGPS Defined benefit (DB) scheme Final salary (FS) Member contributions fixed Employer pays “balance of cost” Funded scheme (not pay-as-you-go) Assets built up from contributions, investment income, investment growth in order to meet future benefit payments 5
Promise now, pay later Lump Sum Expenditure Member’s Dependant’s Pension Pension Contributions Income 40 65 85 Death Retirement Recruitment 6
Pension promises – a long term commitment Future Benefit Payments (Past Service) Benefit payments Pensioners Deferreds Actives 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 Years from Valuation Date Source: Hymans Robertson LLP , sample client 7
Profile of emerging expenditure Funded schemes like LGPS have investment income too Source: sample LGPS Fund; new entrants for 50 years 8
9 Funding valuations
10 Keep her covered !
Triennial valuation of Fund - purposes Compliance with legislation Recommend contribution rates Common rate Individual employer rate – “peculiar” Assess reserves needed for accrued liabilities Assess solvency (“funding level”) Monitor experience vs. assumptions Actuary must have regard to Funding Strategy Statement (FSS) 11
Summary of the valuation process Data Benefits FSS Assumptions Q2/2010 Past service surplus or deficit? Q3/Q4 Value Assets & 2010 Administering Authority/ Value Liabilities Employer Consultation Rates and Q1 Valuation 2011 Adjustments Certificate Report Norfolk is test site for 2010 data 12
13 Valuing the liabilities of the Fund
Value today of £100 in 10 years time Future In 10 years Assumed How much inflation £100 grows future cash do I to investment need today return Zero £100 7% £48 3% £134 7% £65 3% £134 5% £80 Higher inflation => need more cash today Lower future investment return => need more cash today 14
Discount rate: assumed future investment return Discount rate = 6.1% Outperformance Gilt yield 4.5% 1.6% Discount rate = bond yield plus allowance for expected outperformance 15
Value of Pension Fund Liabilities: How much money do I need today? 30 years £1,000 p.a. 60 90 Capitalised cost ignoring interest = £30,000 Capitalised cost allowing for interest 1 = £14,100 Capitalised cost allowing for interest and inflation 2 = £20,100 1,2 Assume 6% investment return and 3% inflation .. and allow for probability of survival 16
Early retirement with unreduced pension is costly £10k pa for 12 years = £120k Expected Pension in Payment Actual £10k pa for 22 years = £220k Unreduced Pension in Payment Age at Current Age at Death Age Retirement 77 55 65 This is what happens with redundancy/efficiency retirements Note: Illustration above ignores interest and inflation 17
Early retirement due to ill-health is also costly £10k pa for 12 years = £120k Pension in Payment £10k + say £5k pa for 22 years = £264k Ill-heath Enhancement (say £5k) Unreduced Pension in Payment (£10k) Age at Current Age at Death Age Retirement 77 55 65 Note: Illustration above ignores interest and inflation 18
Discount rate used depends on purpose 47.6m 38.5m 32.6m 6.7% 5.8% 4.2% Liabilities Liabilities Liabilities March 09 March 09 March 09 FRS17 Ongoing Termination Shortfall on “gilts” termination basis is higher 19
20 2000-02 1990-92 Life Expectancy at age 65: England and Wales 1980-82 Source: Government Actuary, English Life Table series of mortality tables Women 1970-72 Men 1960-62 1950-52 1930-32 1920-22 1910-12 Living much longer 1901-10 1891-1900 1881-90 1871-80 1838-54 87 85 83 81 79 77 75 73 71 69 67 65 Average Expected Age at Death
Two years of improvement per decade Expected age at death of a 65 year old 82.7 +2.8 2007 82.3 2006 +2.9 81.9 +2.9 2005 81.7 +3.0 2004 81.4 +2.9 2003 81.1 2002 +3.2 81.0 +3.4 2001 2000 80.8 +3.4 80.5 1999 +3.3 80.4 1998 +3.2 80.4 +3.5 1997 80.0 +3.5 1996 79.8 1995 +3.3 79.7 1994 +3.5 1993 79.4 +3.6 65 70 75 80 85 90 Men Extra Years for Women Period expectations of life derived from calculated crude mortality rates. Source: Club VITA LLP, part of the Hymans Robertson group 21
East meets west High life expectancy Mid life expectancy Low life expectancy Source: Club Vita research based on VitaBank as at 2 October 2008 22
Effect of salary increases on liabilities Example: age 55 years £70k salary 10% pay rise accrued pension = £20,000 Cost of pay rise = £7k in first full year Additional pensions liabilities = £30k Extra pension liabilities can cost more than extra pay 23
Fund valuation - assumptions Amounts paid and probability of payment Financial Assumptions Demographic Assumptions Inflation Life expectancy Pay increases Retirement age and cause Pension increases Withdrawals Investment return Marriage statistics Consider: Consider: Economic outlook Population trends Actual Scheme assets Members’ social status Historical pay growth Past Scheme experience 24
2. Valuation update to January 2010 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
What has changed since 2007 Negatives Investment experience since 2007 Government bond yields lower (inflation linked) Higher inflation expected over the long term Future improvements in life expectancy? Positives More realistic assumption for current life expectancy Pay increases may be lower than assumed? Cost sharing or “cap and share” (increases employee contribution rate or reduces benefits) but formula ignores effect of actual investment returns and market conditions 26
LGPS assets and liabilities since last valuation Assets underperformed, liability values increased Source : Hymans Robertson, Median LGPS Fund March 07 to Nov 09 27
Underperformance of investments damaging ... ... but increase in liabilities also significant Based on 20 year deficit spread period, experience from 31 January Median Fund Navigator report 28
Change in value placed on liabilities 31 March 31 January Effect on Value 2007 2010 of Liabilities Discount rate 6.1% 6.0% Increase Salary increases 4.7% 5.3% Increase Inflation 3.2% 3.8% Increase Net discount rate* 2.8% 2.2% Increase *Net discount rate is the discount rate less inflation Net discount rate has reduced by around 0.6% pa This increases the value placed on liabilities (and the cost of benefits accruing) by around: 12-15% for active and deferred liabilities 7% for pensioner liabilities 29
Funding level Source: Hymans Robertson, Navigator, sample LGPS Fund Funding level (solvency) has fallen 100% 40% 50% 60% 70% 80% 90% 31-Mar-07 1-May-07 1-Jun-07 1-Jul-07 1-Aug-07 1-Sep-07 1-Oct-07 1-Nov-07 1-Dec-07 1-Jan-08 1-Feb-08 1-Mar-08 1-Apr-08 1-May-08 1-Jun-08 1-Jul-08 1-Aug-08 1-Sep-08 1-Oct-08 Ongoing Funding Basis 1-Nov-08 1-Dec-08 1-Jan-09 1-Feb-09 1-Mar-09 1-Apr-09 1-May-09 1-Jun-09 1-Jul-09 1-Aug-09 1-Sep-09 30
% of Pensionable Payroll Theoretical contributions higher Source: Hymans Robertson, Navigator, sample LGPS Fund 10% 15% 20% 25% 30% 35% 40% -5% 0% 5% 31-Mar-07 1-May-07 1-Jun-07 1-Jul-07 Results differ for individual employers 1-Aug-07 1-Sep-07 1-Oct-07 1-Nov-07 1-Dec-07 1-Jan-08 1-Feb-08 1-Mar-08 1-Apr-08 1-May-08 1-Jun-08 1-Jul-08 1-Aug-08 1-Sep-08 1-Oct-08 1-Nov-08 1-Dec-08 1-Jan-09 1-Feb-09 1-Mar-09 1-Apr-09 1-May-09 1-Jun-09 1-Jul-09 1-Aug-09 1-Sep-09 payments Deficit Rate Future Service Total 31
How extreme are current conditions? Median 1 in 20 chance 1 in 100 chance Funding levels within range modelled Source: Hymans Robertson comPASS system 32
3. Individual Employers Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
Why do contribution rates vary between employers? Different membership profiles (average age, sex, etc) Different experience Salaries Mortality Ill-health retirements Transfers in and out, e.g. TUPE transfer / outsources Previous contributions paid to recover deficit Previous contributions paid to recover early retirement strains Security/guarantors Different deficit spread periods 34
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