1 Hampshire Pension Fund Annual Employers Meeting 30 October 2013 10:00 am.
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Transcript of 1 Hampshire Pension Fund Annual Employers Meeting 30 October 2013 10:00 am.
1
Hampshire Pension FundAnnual Employers Meeting
30 October 201310:00 am
2
Fire Alarms• Should fire alarms sound, please
make your way back to the Main Entrance and exit onto Sussex Street
• Turn left and walk to the end of Sussex Street, cross the road and go past the white barrier to the Assembly Point, which is outside the Great Hall on Castle Avenue
3
Hampshire Pension FundAnnual Employers Meeting
30 October 2013
Welcome
Councillor Mark Kemp-Gee
Chairman, Pension Fund Panel
4
Today’s programme10:00 Chairman of the Pension Fund Panel – Cllr Mark
Kemp-Gee
10:10 Annual Report for 2012/13 – Carolyn Williamson
10:20 Pensions Administration update – Nick Weaver10:30 Accounts for 2012/13 and Fund Performance –
Ian Howell10:40 Economic and market outlook – Carolan Dobson
10:50 Coffee break
11:05 Update from the Fund Actuary – Tim Lunn
12:25 General question and answer session12:45 Close
5
Hampshire Pension Fund
Annual Report for 2012/13
Carolyn Williamson Director of Corporate Resources
6
Annual report for 2012/13Copies now availablePart of the Pension Fund’s communication strategy with Fund employers, alongside: this Annual Employers Meeting the Employer’s Guide employer training and liaison meetings the website at www.hants.gov.uk/pensionsWe would like your comments please on the Annual Report and this Annual Meeting
7
Annual report for 2012/13 Contents
LGPS 2014 – from April 2014Investment returns in 2012/13Accounts for 2012/13Statutory statements - revised and updatedDoes the Annual Report meet your needs?
8
Pension Fund Panel
9 county councillors1 representative of Portsmouth City Council 1 representative of Southampton City Council2 representative of the Hampshire district councils1 representative of pensioners1 representative of contributorsPlus an independent adviser, without voting rights
9
Pension Fund PanelCounty councillors: Mark Kemp-Gee (Chairman) Christopher Carter Criss Connor Andrew Gibson Andrew Joy Peter Latham Tim Rolt Bruce Tennant Tom Thacker
City councils’ representatives:
Gerald Vernon-Jackson (Portsmouth)
Stephen Barnes-Andrews (Southampton)
District councils’ representative:
Peter Giddings (Test Valley) John Leek (Basingstoke &
Deane)Pensioners’ representative: Cliff AllenContributors’ representative:
Phillip Reynolds
Independent adviser (non-voting): Carolan Dobson
10
At 31 March 2013 3.9% more pensioners, and 1.5% more contributors
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Contributors Deferreds Pensioners at 31 March
11
Hampshire County Council21,279 46%
Southampton City Council4,151 9%
Portsmouth City Council4,793 10%
District Councils4,334 10%
Hampshire Police2,374 5%
Other organisations9,388 20%
Total 46,319
Number of contributors by employer31 March 2013
12
Number of contributors by employer
31 March 2012
31 March 2013
Change
%
Change since 31 March 2010
%
Hampshire County Council 20,911 21,279 +1.8% -7.0%
Southampton City Council 4,339 4,151 -4.3% -26.0%Portsmouth City Council 4,734 4,793 +1.2% -3.2%District councils 4,214 4,334 +2.8% -4.7%Hampshire Police Authority 2,203 2,374 +7.8% -9.6%
Other organisations 9,232 9,388 +1.7% +11.9%Total 45,633 46,319 +1.5% -5.5%
13
Key issues in the last 12 months working towards the introduction of
LGPS 2014, from 1 April 2014 the actuarial valuation at 31 March
2013 the tactical asset allocation portfolio,
introduced in September 2012 re-tendering the Pension Fund’s global
custody contract, with the appointment of JP Morgan from 1 August 2013
for employers: auto enrolment
14
Challenges ahead . . . LGPS 2014 and its
implementation the outcome of the actuarial
valuation at 31 March 2013 reviewing the investment
strategy changing business and
employment structures for employers
the investment climate structural reform – Government
review
15
Any questions?Any questions?
Annual report for 2012/13
16
Hampshire Pension Fund
Fund Administration updateNick Weaver
Head of Pensions Services
17
The Fundamentals ….page 17
18
The Past Year ….• Integrated Payroll• Valuation Data• The Cyprus problem• Tax rule change and
ABS’ • Software National
Framework
19
Next Year• 2014 Scheme
– Presentations / workshops– Newsletters / website / email
updates– Employer Focus Group
• New system – Benefits– Impact on Employers
20
Further demands on Employers• Already got challenge of Auto Enrolment
• Now more demand from the LGPS:– 2 x Pensionable Pay figures– Opt out risk (due to rise in contribution rates)– 50:50 option– CARE data accuracy
• The result is more pressure on your HR / Payroll teams
21
The 2014 Scheme is a big, demanding burden !
22
Our aim is to support you …
23
We are here to help !
24
For more information …Please see:
– Website www.hants.gov.uk/pensions – Pensions Matters
Or contact us on:– 01962 845588– [email protected]
25
Any questions?Any questions?
Fund Administration update
26
Hampshire Pension Fund
Accounts for 2012/13 and Fund Performance
Ian Howell Investment and Borrowing
27
Accounts 2012/13Headlines
£m %Value of Fund 4,3
41+14.
9%
Total income 319 -8.3%Total expenditure
230 +2.9%
Surplus reinvested
89 -28.3
%
28
Income 2012/13£m %
Contributions - employers 16
4-5.8%
- employees 53 -3.2%Incoming transfers
14 -55.0
%Investment income
88 +0.4%
Total 319
-8.3%
29
Expenditure 2012/13£m %
Pensions and other benefits
159 +9.8%
Lump sums 39 -32.2%
Outgoing transfers 20 +101.1%
218 +2.9%Investment management exps
9 +2.7%
Administrative expenses
3 +5.7%
Total 230 +2.9%
30
Income and expenditure 2012/13
-225
-175
-125
-75
-25
25
75
125
175
225
275
Contributions£231m
Investment income£88m
Benefits £218m
Investmentexpenses £9m
Administrativeexpenses £3m
£m
31
Total value of the Pension Fund from 2008 to 2013 At 31 March
Value
£m
Change
%
Surplus
£m2008 2,94
8+1.0
%127
2009 2,396
-18.7%
136
2010 3,238
+35.1%
124
2011 3,558
+9.9%
124
2012 3,777
+6.1%
124
2013 4,341
+14.9%
89
32
Hampshire Pension Fund now £4,308m
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
£m
to 30 September 2013
33
Investment performancein 2012/13
34
The Fund’s investment managers
Global equitiesUK equitiesGlobal bondsUK index linked bondsAlternative investmentsPropertyTactical asset allocation
35
Investment Managers 31 March 2013Total Fund £4,341m
CBRE (UK property) £271mAberdeen (European property) £49m
Alternative investments £310m
Cash £63m
Aberdeen (global equities) £646m
Tactical asset allocation £702m
Newton (global equities) £564m
Schroders (UK equities) £642m
Western (global bonds) £200m
Legal & General (UK index linked bonds) £491m
State Street (UK index linked bonds) £395m
Aberdeen (frontier markets) £8m
36
Asset Allocation by Portfolio 31 March 2013Total Fund £4,341m
Property £320m (7%)
Alternative investments £310m (7%)
Cash £63m (1%)
Global equities £1,218m (28%)
UK equities £642m (15%)
Global bonds £200m (5%)
UK index linked bonds £886m (21%) Tactical asset allocation £702m (16%)
37
1.4%
5.3%
7.6%11.7%
14.4%16.8%
17.5%
18.0%
19.3%
20.0%
0% 5% 10% 15% 20%
Pacific Basin equitiesNorth American equities
European equitiesGlobal equities
UK equitiesJapanese equities
UK Index Linked bondsEmerging Markets equities
Global bondsUK property
Market returns in 2012/13
38
Total investment returns for the Fund12 months to 31 March 2013
15.0%
13.5%
15.1%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Total Fund return
Weighted benchmark indices
Weighted benchmarks plus targets
39
Total investment returns for the Fund3 years to 31 March 2013
8.3%
5.1%
15.0%
30.8%
9.4%
0% 4% 8% 12% 16% 20% 24% 28% 32% 36%
Year to 31 March 2011
Year to 31 March 2012
Year to 31 March 2013
3 years - cumulative
3 years - per annum
40
Total investment returns for the Fund3 years to 31 March 2013
9.4%
9.1%
11.1%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Total Fund return
Weighted benchmark indices
Weighted benchmarks plus targets
41
Any questions?Any questions?
Accounts and performance
42
Hampshire Pension Fund
Economic and market outlook
Carolan Dobson Independent Adviser and Trustee Services
iAts
Investment Adviser and Trustee Services iAts
Economic and market outlook October 2013
43
Investment Adviser and Trustee Services iAts
Themes from last year
• Central bank intervention • Draghi’s do all it takes speech• High budget deficits• Glimmers of hope; leading indicators
US house prices
44
Investment Adviser and Trustee Services iAts
Source FT.
45
Investment Adviser and Trustee Services iAts
46
Investment Adviser and Trustee Services iAts
47
Investment Adviser and Trustee Services iAts
48
Investment Adviser and Trustee Services iAts
49
Investment Adviser and Trustee Services iAts
50
Investment Adviser and Trustee Services iAts
51
Investment Adviser and Trustee Services iAts
Global Economic ForecastsReal GDP % ch yoy 2013 2014 2015 2016
USA 1.6 2.9 3.2 3.0Euro area -0.4 0.9 1.2 1.5Japan 1.9 1.8 1.4 1.5BRICS 5.8 6.2 6.8 6.9
Source: Goldman Sachs
52
Investment Adviser and Trustee Services iAts
53
Investment Adviser and Trustee Services iAts
54
Investment Adviser and Trustee Services iAts
55
Investment Adviser and Trustee Services iAts
56
Investment Adviser and Trustee Services iAts
Looking forward to the future
• Economic growth picking up across world but at a steady rather than exciting rate
• Uncertainty caused by difficulties in agreeing US budget
• QE will be reduced and eliminated sometime• Risk is not getting much pricing premium• Don’t be greedy moment
57
58
Any questions?Any questions?
Economic and market outlookCarolan Dobson
59
Annual Employers Meeting
Coffee break
60
Hampshire Pension Fund
Annual Employers Meeting
30 October 2013
Prepared by Tim Lunn FIAPublic Sector Consulting
Hampshire County Council Pension FundAnnual Employers’ Meeting
The 2013 actuarial valuation
30 October 2013Tim Lunn FIA
Public Sector ConsultingProprietary & Confidential | 26 October 2012 62
Agenda
A bit about actuarial valuations Review of experience - what’s happened
Setting assumptions for the future – projection factors
Setting assumptions for the future – demographic factors
Setting assumptions for the future – discount rate
Results
Prepared by Tim Lunn FIAPublic Sector Consulting
A bit about actuarial valuations
Public Sector ConsultingProprietary & Confidential | 26 October 2012 64
What’s it all about?
Sensible check on pace of fundingRegulatory requirement
Assets
Liabilities
Public Sector ConsultingProprietary & Confidential | 26 October 2012 65
Regulations – solvency versus smoothness
36.—(1) Each administering authority must obtain—(a) an actuarial valuation of the assets and liabilities of each of its
pension funds …….., and(c) a rates and adjustments certificate prepared by an actuary.(4) A rates and adjustments certificate is a certificate specifying—(a) the common rate of employer’s contribution; and(b) any individual adjustments, ……..(5) The common rate of employer’s contribution is the amount which, in
the actuary’s opinion, should be paid to the fund by all bodies whose employees contribute to it so as to secure its solvency, expressed as a percentage of the pay of their employees who are active members.
(6) The actuary must have regard to— ……..(b) the desirability of maintaining as nearly constant a common rate as
possible; ………
Public Sector ConsultingProprietary & Confidential | 26 October 2012 66
Calculations
LiabilitiesSum, for each potential payment, of
Benefit amount x Probability x Projection factor x Discount factor (Data) (Demographic) (Financial) (Financial)
AssetsSum, for each receipt, of
Income amount x Probability x Projection factor x Discount factor (eg Dividend) (roughly 1 ?) (eg Div Growth) (As per liabilities)
Pay, service, benefit structure
Withdrawal, death,Ill health, retirement
Pay increases,Pension increases
Investmentreturn
Public Sector ConsultingProprietary & Confidential | 26 October 2012 67
Past service position – 2010 valuation
Based on 2010 actuarial valuation report £M
Liabilities Pensioners 1,727Deferreds 711Actives 2,055
4,494Assets (Market value) 3,238
Surplus/(Deficiency) (1,256)
Funding ratio 72%
Public Sector ConsultingProprietary & Confidential | 26 October 2012 68
Past service/Future service
Join Valuation Retire
Past Service Future Service
Benefits earned
Assets
Cost as % pay
Public Sector ConsultingProprietary & Confidential | 26 October 2012 69
A bit of background to assumption settingComplete balance sheet – 2010 valuation
Future service position % of payCost of future service 19.4%
Members’ contributions (6.5%)
Administration expenses 0.3%
Future service employer cost 13.2%
Past service position 2010Value of liabilities £4,494M
Market value of assets £3,238M
Surplus/(deficiency) (£1,256M)Funding ratio 72%
Cost of surplus/deficiency % of pay
Recovery contributions (25 year recovery period)
6.5 %
Total employer rate 19.7%
Assumptions
Assumptions
RecoverySolvency
Public Sector ConsultingProprietary & Confidential | 26 October 2012 70
Altering the level of risk in the valuationSOLVENCY
Smoothing adjustments
Different funding target (e.g. 75%)
Difficult to assess impact on risk
RECOVERY
Recovery period
Stepping pattern
Difficult to assess impact on risk
ASSUMPTIONS (FUNDING TARGET)
Most easily measured and adjusted assumption
Discount rate (i.e. expected investment return on the Fund’s assets)
Other assumptions that could be varied, but are not so easily justified or measured
Pay increases Mortality Commutation
Pension increases Turnover rates
Solvency
RecoveryAssumptions
Public Sector ConsultingProprietary & Confidential | 26 October 2012 71
Risk versus Cost - smoothness
Valuation result depends on:Matters of fact
Promises madeObserved experience since last valuation
Assumptions – the more optimistic, the more riskyProjection FactorsProbabilitiesDiscount Rate
Risk
Cost
Public Sector ConsultingProprietary & Confidential | 26 October 2012 72
Valuation process
Obtain data– Membership data– Accounts, assets– Employer information
Review experience– This will have already affected the valuation outcome
Set new assumptions– This will further affect the valuation outcome, impact can be large– Need to balance risk/cost
Carry out calculations If appropriate, rebalance risk and cost
– Is the overall level of risk acceptable?– Are inter-employer risks acceptable?– Are costs manageable?
Finalise calculations and report
Prepared by Tim Lunn FIAPublic Sector Consulting
Review of Experience - what’s happened
Public Sector ConsultingProprietary & Confidential | 26 October 2012 74
Membership data
2010 2013Actives
Number 49,336 47,178Payroll (£m) (yr to 31/3) 877 809SB Group (yr to 31/3) 847 781AB Group (yr to 31/3) 17.8 16.5
DeferredsNumber 39,864 50,184Deferred pension (£m) 48 63
Pensioners and DependantsNumber 28,933 33,102Pension (£m) 127 166
Public Sector ConsultingProprietary & Confidential | 26 October 2012 75
Key elements of experience
Actual Assumed
Fund investment return +30.8% +21.8%
Pension increases +10.8% +10.2%
Inflationary Pay growth (approx) + 4.6% +16.8%
Payroll progression - 8.0% + 16.8%
Market yields (pa) -1.3% nil
Emerging analysis of RPI/CPI Gap pa >1.0% 0.5%
Public Sector ConsultingProprietary & Confidential | 26 October 2012 76
New benefit structure
PAST SERVICE Pre 2008
– Final salary - 1/80 + 3/80 lump sum– NRA generally Rule of 85 Age
Post 2008– Final salary - 1/60 (with commutation option)– NRA generally age 65 with protections
FUTURE SERVICE Post 2014
– CARE - 1/49 with CPI revaluation– NRA generally SPA with further protections
Prepared by Tim Lunn FIAPublic Sector Consulting
Setting assumptions for the futureProjection factors
Public Sector ConsultingProprietary & Confidential | 26 October 2012 78
CPI linked pension increases
At the last valuation we assumed that CPI linked increases would be: ‘Break even’ inflation less 0.5% pa Which was
– 3.8% - 0.5% = 3.3% pa
At this valuation we are assuming: ‘Break even’ inflation less 1.2% pa Which was
– 3.6% - 1.2% = 2.4% pa
Why?
Public Sector ConsultingProprietary & Confidential | 26 October 2012 79
RPI vs CPI
-4%
-3%
-2%
-1%
0%
1%
2%
3%
1999 2001 2003 2005 2007 2009 2011
Difference due to formula effect
Increase in RPI less increase in CPI
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1999 2001 2003 2005 2007 2009 2011
Annual increase in RPI
Annual increase in CPI
Average difference over the periodexcluding the formula effect
New assumed differentialCPI inflation = RPI inflation- 0.3% pa Inflation Risk Premium- 0.7% pa Formula Effect- 0.2% pa Constituent Effect= RPI – 1.2% pa
Formula effect
Constituent effect
Inflation risk premium
Public Sector ConsultingProprietary & Confidential | 26 October 2012 80
RPI versus CPI
Analysis by the OBR
In December 2011, the Office for Budget Responsibility (OBR) produced a long-term estimate for the difference between RPI and CPI of 1.4% p.a.
This is higher than our best estimate for this differential because:
• The OBR’s analysis starts from the position of the economy being in balance rather than its actual current position.
• Our best estimate reflects the market consensus for future levels of RPI and CPI. In turn, the market consensus takes account of the OBR’s estimate together with all other views.
Public Sector ConsultingProprietary & Confidential | 26 October 2012 81
Pay Increases
At the last valuation we assumed that inflationary pay increases would be: ‘Break even’ inflation plus 1.5% pa Which was
– 3.8% - 1.5% = 5.3% pa
At this valuation we are assuming: CPI increases plus 1.5% pa Which was
– 2.4% + 1.5% = 3.9% pa
Why?
Public Sector ConsultingProprietary & Confidential | 26 October 2012 8282
Total observed increases
Black line shows rough split between ‘promotional’ and ‘inflationary’ progressionBlue line shows promotional progression assumed at the 2010 valuation
Experience analysis for the period 2010 to 2013
0%
1%
2%
3%
4%
5%
6%
7%
22 to23
24 to25
26 to27
28 to29
30 to31
32 to33
34 to35
36 to37
42 to43
44 to45
46 to47
48 to49
50 to51
52 to53
54 to55
56 to57
58 to59
60 to61
62 to63
64 to65
Age
Pay
incr
ease
p.a
.
Male pay increase, actual
Female pay increase, actual
Average general salary increases awarded over 2010 to 2013 (assumed p.a.)
Pay increase, expected
Public Sector ConsultingProprietary & Confidential | 26 October 2012 83
Proposals for pay increases
Two key changes in relation to the ‘inflationary element’ Shorter term assumption
– CARE scheme means final salary benefits will phase out– Take account of timing of any catch up vs private sector?– Assuming a delay in catch up could lead to a lower assumption
Of much reduced importance– CARE scheme means it only really affects past service and– Potentially, value of future recovery contributions
Are expectations more CPI linked these days?ProposalPropose to change assumption from RPI + 1.5% pa to CPI + 1.5% pa = 3.9% paAnticipates short term suppression in pay increases followed by some catch upNo change to ‘promotional’ assumptions
Prepared by Tim Lunn FIAPublic Sector Consulting
Setting assumptions for the futureDemographic factors
Public Sector ConsultingProprietary & Confidential | 26 October 2012 8585
Base mortality rate – scaling adjustments – post retirementPropose small adjustment to female normal health retirementsMales Females
Experience analysis for the period 2010 to 2013
0%
5%
10%
15%
20%
50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 to 89 90 to 94Age
Dec
rem
ent r
ate
(dea
ths)
- w
eigh
ted
by a
mou
nts
Actual male deaths (weighted by amount)
Expected male deaths, A/E 101.4%
Scaling of test table Scaling of test table
Normal health
Experience analysis for the period 2010 to 2013
0%
5%
10%
15%
20%
50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 to 89 90 to 94Age
Dec
rem
ent r
ate
(dea
ths)
- w
eigh
ted
by a
mou
nts
Actual female deaths (weighted by amount)
Expected female deaths, A/E 92.1%
Proposed female mortality table, A/E 97.0%
Scaling of test table Scaling of test table
Normal health
Experience analysis for the period 2010 to 2013
0%
5%
10%
15%
20%
50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 to 89 90 to 94Age
Decr
emen
t rat
e (d
eath
s) -
wei
ghte
d by
am
ount
s
Actual male deaths (weighted by amount)
Expected male ill health death rates, A/E 118.0%
Ill health
Experience analysis for the period 2010 to 2013
0%
5%
10%
15%
20%
50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 to 89 90 to 94Age
Dec
rem
ent r
ate
(dea
ths)
- w
eigh
ted
by a
mou
nts
Actual female deaths (weighted by amount)
Expected female ill health death rates, A/E 151.3%
Ill health
Public Sector ConsultingProprietary & Confidential | 26 October 2012 86
Mortality improvement ratesPropose increasing long term rate from 1.25% pa to 1.5% pa
Deaths by cause over time for England & Wales population
0
1,000
2,000
3,000
4,000
5,000
1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
Rat
e pe
r mill
ion
Circulatory (heart / stroke) Cancers Respiratory Infections
Chart 2: Deaths by cause over time for England & Wales population
Chart 1: Life expectancy at age 60 (UK population)
12141618202224
1900 1920 1940 1960 1980 2000
Males Females
* The thick lines are smoothed whereas the tagged lines are the actual unsmoothed life expectancies
Deaths by cause over time for England & Wales population
0
1,000
2,000
3,000
4,000
5,000
1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
Rat
e pe
r mill
ion
Circulatory (heart / stroke) Cancers Respiratory Infections
Chart 2: Deaths by cause over time for England & Wales population
Chart 1: Life expectancy at age 60 (UK population)
12141618202224
1900 1920 1940 1960 1980 2000
Males Females
12141618202224
1900 1920 1940 1960 1980 2000
Males Females
* The thick lines are smoothed whereas the tagged lines are the actual unsmoothed life expectancies
−2%
−1%
Nil
+1%
+2%
+3%
+4%
+5%
+6%
1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
Annu
al im
prov
emen
t rat
e
Chart 1: Male mortality improvement England & Wales
−2%
−1%
Nil
+1%
+2%
+3%
+4%
+5%
+6%
1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
Annu
al im
prov
emen
t rat
e
Chart 2: Female mortality improvement England & Wales
Public Sector ConsultingProprietary & Confidential | 26 October 2012 87
Why focus on the female rate?One reason male mortality has recently improved faster than female mortality is because the difference between them is reverting to its historical norm. From 1940s to the 1960s, male mortality became relatively worse than female mortality. However, since the 1960s, male has been catching back up with female mortality.Chart shows the different between male and female mortality rates over time (horizontal axis) and age (vertical axis). The differential increases the ‘hotter’ the colour.
Difference in male v female absolute log(mortality)England & Wales (Δ=5)
≤ Nil
+10.0%
+20.0%
+30.0%
+40.0%
+50.0%
+60.0%
+70.0%
+80.0%
+90.0%
≥ +100.0%
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
40
50
60
70
80
90
Age
Chart 1: Male v female mortality rates for England & Wales populationDifference in male v female absolute log(mortality)England & Wales (Δ=5)
≤ Nil
+10.0%
+20.0%
+30.0%
+40.0%
+50.0%
+60.0%
+70.0%
+80.0%
+90.0%
≥ +100.0%
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
40
50
60
70
80
90
Age
Chart 1: Male v female mortality rates for England & Wales population
Public Sector ConsultingProprietary & Confidential | 26 October 2012 8888
Mortality – scalar adjustments – post retirement
Sex and type of
retirement
SAPS standard mortality table
Scaling factor
Future improvements
Life expectancycurrent age
65 45
2013Men (NH) Normal health
Light
100% CMI projections1.5% p.a. long term rate
89.3 91.4
Women (NH) 95% 91.0 93.3
Men (IH) Ill healthAll pension amounts
80% CMI projections1.5% p.a. long term rate
86.9 89.5
Women (IH) 80% 90.6 93.3
2010Men (NH)
Normal healthLight
100%CMI projections
1.25% p.a. long term rate
89.0 90.7
Women (NH) 100% 90.0 91.9
Men (IH)Ill health
All pension amounts
80%CMI projections
1.25% p.a. long term rate
86.5 88.6
Women (IH) 80% 89.8 92.1
Public Sector ConsultingProprietary & Confidential | 26 October 2012 89
Demographic assumptions
Post Retirement Mortality
Base rates Small reduction for females (normal health)
improvement rates Increased 1.25% pa to 1.5% pa
Pre Retirement Mortality Small reduction for males and females
Ill health retirements and tiers Small changes
Withdrawals Reduced rates
Normal Retirement Pattern Small increase in average age of retirement
Commutation No material change
Family assumptions No material change
50/50 Scheme take up Per GAD assumption
Prepared by Tim Lunn FIAPublic Sector Consulting
Setting assumptions for the future Discount rate
Public Sector ConsultingProprietary & Confidential | 26 October 2012 91
INPUT OUTPUT
Discount rate Current funding ratio Employer contributions
Setting the risk in the funding strategy
• Determined by 3 key decisions• The three decisions drive the choice of discount rate• Can be applied at whole Fund, Group or individual employer level
1. Determine solvency targetPrudent Best estimate
2. Consider when you want to get thereShort term Longer term
3. Set probability of successPrudent Best estimate
Public Sector ConsultingProprietary & Confidential | 26 October 2012 92
Modelling the risk
Suc
ceed
Fail
How long to get there
Where you are nowand what you pay
Stochastic projection of the ongoing funding ratio - ongoing basis same as solvency basis
1
2
3
1 + 2 + 3 =
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So how much risk?Grouped Employers 2007 Valuation
75% (approx) chance of solvency after 25 years
2010 Valuation65% (approx) chance of solvency after 25 yearsTemporary extreme measure for extreme circumstances
2013 ValuationDoes anything in the range 65% to 75% give smoothness of rates?Apparently so !!! Use of a discount rate of 5.5% paEquates to broadly 70% chance of success (approx due to shape of Stream 1)Gives a small benefit to most employers
Prepared by Tim Lunn FIAPublic Sector Consulting
Results
Public Sector ConsultingProprietary & Confidential | 26 October 2012 95
Valuation balance sheet – 2010 valuation
Future service position % of pay % of pay % of payCost of future service 19.4% 19.3% 21.9%
Members’ contributions (6.5%) (6.5%) (6.6%)
Administration expenses 0.3% 0.3% 0.3%
Future service employer cost 13.2% 13.1% 15.6%
Past service position Whole Fund SB Group AB GroupValue of liabilities £4,494M £4,200M £132M
Market value of assets £3,238M £2,974M £102M
Surplus/(deficiency) (£1,256M) (£1,226M) (£30M)Funding ratio 72% 71% 77%
Cost of surplus/deficiency % of pay % of pay % of pay
Recovery contributions (25 years from 1/4/11)
6.5 % 6.5% 9.4%
Total employer rate 19.7% 19.6% 25.0%
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Scheduled Body Group2010 Stream of deficiency contributions
2013
6 yrs
25 yrs
22 yrs
16 yrs
2035
~12% pa
5.3% pa
2019
Public Sector ConsultingProprietary & Confidential | 26 October 2012 97
Admission Body Group2010 Stream of deficiency contributions
2013
6 yrs
25 yrs
22 yrs
16 yrs
2035
25% pa
5.3% pa
2019
15% pa
Public Sector ConsultingProprietary & Confidential | 26 October 2012 98
2013 draft balance sheet – discount rate 5.5%
Future service position % of payCost of future service 19.4% 20.2% 20.1% 22.0%
Members’ contributions (6.5%) (6.4%) (6.4%) (6.7%)
Administration expenses 0.3% 0.3% 0.3% 0.3%
Future service employer cost 13.2% 14.1% 14.0% 15.6%
Past service position (£M) 2010 WoF Whole of Fund SB Group AB GroupValue of liabilities 4,494 5,430 5,092 153.1
Market value of assets 3,238 4,341 4,021 125.4
Surplus/(deficiency) (1,256) (1,089) (1,071) (27.7)Funding ratio (%) 72% 80% 79% 82%Present value of 2010 Stream (22 years) 1,499 48.2
Net past service surplus/deficiency 428 20.5
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2013 draft balance sheet – discount rate 5.5%
Future service position % of payCost of future service 19.4% 20.2% 20.1% 22.0%
Members’ contributions (6.5%) (6.4%) (6.4%) (6.7%)
Administration expenses 0.3% 0.3% 0.3% 0.3%
Future service employer cost 13.2% 14.1% 14.0% 15.6%Capital cost of keeping FS at 13.1% (22 yrs) (136)Net financial position 294 20.5
Past service position (£M) 2010 WoF Whole of Fund SB Group AB GroupValue of liabilities 4,494 5,430 5,092 153.1
Market value of assets 3,238 4,341 4,021 125.4
Surplus/(deficiency) (1,256) (1,089) (1,071) (27.7)Funding ratio (%) 72% 80% 79% 82%Present value of 2010 Stream (22 years) 1,499 48.2
Net past service surplus/deficiency 428 20.5
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Scheduled Body GroupProposal for utilising £428m
2013
6 yrs
25 yrs
22 yrs
16 yrs
2035
~12% pa
5.3% pa
2019
8.8% pa
3.9% pa
Costs £294m
Public Sector ConsultingProprietary & Confidential | 26 October 2012 101
Reshaped SB group stream of deficiency contributions
-
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
Year
Am
ount
s p.
a.
Stream 1Re-shaped Stream 1
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Dealing with the SB Group deficit
Year commencing
1 April
Deficit at start of year
£m
Interest on deficit
£m
Deficit payment
£m
Deficit at end of year
£m
% change
2013 1,071.0 57.5 50.2 1,078.3 0.7
2014 1,078.3 57.8 54.8 1,081.3 0.3
2015 1,081.3 57.8 59.8 1,079.3 -0.2
2016 1,079.3 57.6 65.1 1,071.8 -0.7
2017 1,071.8 57.0 70.8 1,058.0 -1.3
2018 1,058.0 56.1 77.1 1,037.0 -2.0
2019 1,037.0 54.7 83.9 1,007.9 -2.82020 1,007.9 53.0 87.1 973.8 -3.42021 973.8 51.1 90.5 934.3 -4.1
Reshaping 2010 Stream in this way covers interest on the deficit by 2017
Public Sector ConsultingProprietary & Confidential | 26 October 2012 103
Admission Body GroupProposal for utilising £20.5m
2013
6 yrs
25 yrs
22 yrs
16 yrs
2035
25% pa
5.3% pa
2019
15% pa 20% pa
3.9% pa
4 yrs
Public Sector ConsultingProprietary & Confidential | 26 October 2012 104
Reshaped AB group stream of deficiency contributions
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
Year
Am
ount
s p.
a.
Stream 1
Re-shaped Stream 1
Public Sector ConsultingProprietary & Confidential | 26 October 2012 105
Dealing with the AB Group deficitYear
commencing 1 April
Deficit at start of year
£m
Interest on deficit
£m
Deficit payment
£m
Deficit at end of year
£m
% change
2013 27.7 1.5 0.9 28.3 2.2
2014 28.3 1.5 1.1 28.8 1.6
2015 28.8 1.5 1.3 29.0 0.9
2016 29.0 1.6 1.5 29.1 0.1
2017 29.1 1.5 1.8 28.8 -1.0
2018 28.8 1.5 1.9 28.4 -1.3
2019 28.4 1.5 2.0 27.9 -1.7
2020 27.9 1.5 2.1 27.3 -2.12021 27.3 1.4 2.1 26.6 -2.6
Reshaping 2010 Stream in this way does not cover interest on the deficit until 2020
Public Sector ConsultingProprietary & Confidential | 26 October 2012 106
Summary
Scheduled Body GroupCurrent: 13.1% Pay + Deficiency Stream (12% incs for 6 yrs, 5.3% for 16 yrs)New: 13.1% Pay + Deficiency Stream (8.8% incs for 6 yrs, 3.9% for 16
yrs)
Admission Body GroupCurrent: 15.6% Pay + Deficiency Stream (25% incs for 6 yrs, 5.3% for 16 yrs)New: 15.6% Pay + Deficiency Stream (20% incs for 4 yrs, 3.9% for 18 yrs)
Ungrouped EmployersTo be communicated individually in due course
Public Sector ConsultingProprietary & Confidential | 26 October 2012 107
Copyright © 2013 Aon Hewitt Limited. All rights reserved.Aon Hewitt Limited, 8 Devonshire Square London EC2M 4PL Registered in England & Wales No. 4396810
To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the prior written consent of Aon Hewitt Limited.
Aon Hewitt Limited does not accept or assume any responsibility for any consequences arising from any person, other than the intended recipient, using or relying on this material.
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This document has been prepared for the Administering Authority on the understanding that the Authority is the addressee and only user of this document, but that it may be shown to participating Employers in general Forum. It is a summary of the key points of our advice for the 2013 actuarial valuation. It does not fully comply with the full actuarial professional standards, and readers should refer to our full advice for further explanation.
108
Any questions?Any questions?
Tim Lunn Update from the Fund Actuary