Hampshire Pension Fund Annual Employers Meeting 23 October 2015.
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Transcript of Hampshire Pension Fund Annual Employers Meeting 23 October 2015.
Hampshire Pension Fund Annual Employers Meeting
23 October 2015
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
Councillor Mark Kemp-GeeChairman, Pension Fund Panel & Board
Hampshire Pension FundAnnual Employers Meeting
23 October 2015
Welcome
Today’s programme10:00 Chairman of the Pension Fund Panel & Board – Cllr
Mark Kemp-Gee
10:10 Annual Report for 2014/15 – Carolyn Williamson10:20 2014/15 Accounts and Fund Performance – Andrew
Boutflower10:30 Economic and market outlook – Carolan Dobson10:40 Update from the Fund Actuary – Funding Update –
Joel Duckham11:20 Coffee Break11:35 Pensions Administration update – Nick Weaver11:45 Update from the Fund Actuary – Employer
Considerations– Alison Murray12:30 General question and answer session12:45 Close
Carolyn WilliamsonDirector of Corporate Resources
Hampshire Pension Fund
Annual Report for 2014/15
Annual report for 2014/15Part 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/pensionsAvailable electronically on the Pension Fund’s websiteWe would like your comments please on the Annual Report and this Annual Meeting
Annual report for 2014/15 - ContentsInvestment returns in 2014/15
Accounts for 2014/15Membership reportStatutory statements – revised and updatedNew for 2014/15 based on updated guidance• more detail on the Panel and their
training and development• greater focus on risk managementDoes the Annual Report meet your needs?
At 31 March 2015 - 6.3% more scheme members
38442 38807 39172 39538 39903 40268 40633 40999 41364 41729 42094 -
10,000
20,000
30,000
40,000
50,000
60,000
Contributors
Pensioners
Deferreds
Number of contributors by employer
31 March 2015
Key issues in the last 12 months Continuation of auto-enrolment for employers Implementing the new Pensions
Administration system- UPM Applying the Fund’s new Investment Strategy
– starting to retender investment management contracts
Retendering the contract for the Pension Fund’s actuary – Aon Hewitt reappointed
Responding to further Government consultations on Cost Savings and Governance
Applying for DCLG approval for a Joint Pension Fund Panel & Board – conditional approval granted
Current challenges Continuing to monitor investment
manager performance, taking a phased approach to the retendering of contracts
Bedding in the new UPM system Responding to the Government’s
proposals for pooling investments Preparation for the 2016 actuarial
valuation Responding to scheme member
investment queries e.g. investments in fossil fuels
Pension Fund Panel & Board
Pension Fund Panel & Board• Important to give employers and scheme
members input to key Pension Fund decision making (different to many other funds)
• Single committee should be more efficient and effective
• Try to ensure fair representation – new opportunities for deferred scheme member and non-Local Authority employer
• Closing date for applications for new roles is 6 November, details are on the Pension Fund website
• Government approval is conditional on us reporting back next year – please let us have your feedback
Any questions?
2014/15 Annual Report
Andrew BoutflowerDeputy Investments and Borrowing Manager
Hampshire Pension Fund
2014/15 Accounts and Fund
Performance
Accounts 2014/15 - The main questions
Q. What’s happened to the value of the Fund?A. Now over £5bn, grew by 13.2%
Q. Has the fund maintained a positive cashflow?A. Yes, a small one.
Total value of the Pension Fund from 2009 to 2015
At 31 March
Value (£m)
Change (£)
Change (%)
2009 2,396 -552 -18.7%2010 3,238 842 +35.1%2011 3,558 320 +9.9%2012 3,777 219 +6.1%2013 4,341 564 +14.9%2014 4,536 195 +4.5%2015 5,137 601 +13.2%
Hampshire Pension Fund now £4,860m at 30 September 2015
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,500
£m
Fund income and expenditure 2014/15
* Includes £74.7m bulk transfer out ** Change in CIPFA guidance
£mContributions received 237 +6.5%Pensions paid -174 +4.5%Lump sums paid -43 +15.1%Net transfers in/out * -78Management costs ** -20Investment income (net of tax) 94 +4.8%Net Surplus 16 -83.1%
Fund income and expenditure 2014/15
* Includes £74.7m bulk transfer out ** Change in CIPFA guidance
£mContributions received 237 +6.5%Pensions paid -174 +4.5%Lump sums paid -43 +15.1%Net transfers in/out * -78Management costs ** -20Investment income (net of tax) 94 +4.8%Net Surplus 16 -83.1%
Fund income and expenditure 2014/15
* Includes £74.7m bulk transfer out ** Change in CIPFA guidance
£mContributions received 237 +6.5%Pensions paid -174 +4.5%Lump sums paid -43 +15.1%Net transfers in/out * -78Management costs ** -20Investment income (net of tax) 94 +4.8%Net Surplus 16 -83.1%
Movement in the cash surplus
2009/10 2010/11 2011/12 2012/13 2013/14 2014/150
10
20
30
40
50
60
70
£m
Hampshire Pension Fund
Investment Performance in
2014/15
The Fund’s investment managers
Global equitiesUK equitiesGlobal bondsUK index linked bondsAlternative investmentsPropertyPassive UK/Global equity
Investment Managers 31 March 2015
Asset Allocation by Portfolio 31 March 2015
Total Fund size £5,137m
Market returns in 2014/15
Total investment returns for the Fund
Any questions?
2014/15 Accounts and Fund Performance
Carolan DobsonIndependent Advisor to the Hampshire Pension Fund
Hampshire Pension Fund
Economic & Market Outlook
Investment Adviser and Trustee Services iAts
Economic and market outlook October 2015
31
Investment Adviser and Trustee Services iAts
Themes from last year
• Economic paths are diverging across the developed world• Interest rate policies are becoming different• Markets have to adjust to the US withdrawal from QE and a
move to normal levels of US interest rates• Risk is not priced properly• The Fed believes its role is to establish suitable macro economic
policies and encourage robust financial institutions, not smooth market performance
• Political uncertainty across Europe, rise of anti-Europe vote
32
Investment Adviser and Trustee Services iAts
• Sou
33
US
Investment Adviser and Trustee Services iAts
34
US
Investment Adviser and Trustee Services iAts
35
UK
Investment Adviser and Trustee Services iAts
36
UK
Investment Adviser and Trustee Services iAts
• EE
37
Eurozone
Investment Adviser and Trustee Services iAts
38
Eurozone
Investment Adviser and Trustee Services iAts
39
China
Investment Adviser and Trustee Services iAts
40
China
Investment Adviser and Trustee Services iAts
41
Investment Adviser and Trustee Services iAts
US Federal reserve Outlook
42
Investment Adviser and Trustee Services iAts
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Investment Adviser and Trustee Services iAts
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Joel DuckhamAon Hewitt
Hampshire Pension Fund
Funding Update
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Hampshire County Council Pension Fund Annual Employers’ Meeting
Actuarial and Funding Update
Joel Duckham FIAAlison Murray FFA23 October 2015
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Agenda
Funding update and outlook for 2016 valuation Other issues
– Scheme advisory board– Abolition of contracting-out – Cost management process
Employer considerations– Grouped funding framework– Employer policy
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Funding update and outlook for 2016 valuation
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Recap on 2013 valuation results
Whole of Fund funding ratio: 80.0% (Total Assets/Total Liabilities %)
4,327 956.3 4,661
4,340.6
Funding Target (£5,427.9M)
Assets (£4,340.6M)
Actives Deferreds Pensioners
1,998.6 2,473.0
Deficit (£1,087.3M)
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2013 Valuation – contribution requirements
Average future service rate: 14.1% of pay
Deficit recovery contributions: 7.4% of pay Average Employer rate: 21.5% of
pay
In practice Scheduled body group: 13.1% of pay + monetary
amounts - £59.4M over 2015/16 *- * + 8.8% increase in April 2016,17,18,and 19. Then
3.9% p.a. increase in April 2020 through April 2035 Admitted body group: 15.6% of pay + monetary
amounts- £1.3M 2015/16 *- * + 20.0% increase in April 2016 and 17. Then
3.9% p.a. increase in April 2018 through April 2035 Ungrouped employers paying their own rates
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Key assumptions
Discount rate / investment return: 5.5% p.a. Pension increases : 2.4% p.a. Pay increases: 3.9% p.a. Probability of funding success: 71%
Probability of Funding Success /
Risk
100%
Date
Fund
ing
ratio
(%)
31 Mar 2013
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Progress since 31 March 2013
50%
60%
70%
80%
90%
100%31
/03/
13
30/0
6/13
30/0
9/13
31/1
2/13
31/0
3/14
30/0
6/14
30/0
9/14
31/1
2/14
31/0
3/15
30/0
6/15
Plan Ongoing Funding Ratio
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Explanation of movement in funding position
80% 1%3% -8.0%
1%77%
50%
60%
70%
80%
90%
100%
Funding Level at 31 Mar 2013
Contribution and
Accruals
Asset Out-
performance
Financial Assumptions
Other Funding Level at 30 Jun 2015
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Outlook for contributions
Employers currently paying c£61M p.a. in deficit contributions Approximate update to 30 June 2015 suggests further £15.3M p.a.
required over 22 year deficit recovery period, increasing at 3.6% p.a. (equivalent to c1.7% pay)
31 March 2013 30 June 2015
Employer future service rate 14.1% of pay 16.8% of pay
Past service surplus (shortfall) (£1,087.3M) (£1,547.5M)
Additional deficit contributions p.a. - £15.3M
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Overall impact 4% - 5% pay
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Market movements since 30 June 2015
On a “gilts+” basis, funding level fell 4% between 30 June 2015 and 30 Sept 2015
Our funding approach considers outlook for all asset classes in which you invest, not just gilts
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Mar 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 150.0
1,000,000,000.0
2,000,000,000.0
3,000,000,000.0
4,000,000,000.0
5,000,000,000.0
6,000,000,000.0
7,000,000,000.0Liabilities Assets Deficit
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Recent changes in mortality rates
2000 to 2011 saw strong reductions in mortality rates (i.e. leading to longer life expectancy)– Average (population) improvement rate was 2.4% p.a. over the period
2012 - 2014 improvements in mortality rates were much lower– Experience was flat in 2012 and 2013 (i.e. mortality rates were broadly unchanged from previous
years)– 2014 saw stronger improvements but nothing like enough to get back to the previous trend line
2015 to 31 July - high numbers of deaths compared to previous years, especially in the early months– Overall mortality rates 2.3% higher compared to same period in 2014– Partially due to higher than usual number of deaths from flu
Source: CMI Working Paper 83
Cum
ulat
ive
deat
hs
+30,000
+20,000
+10,000
0
-10,000
-20,0000 10 20 30 40 50
Week number
Cumulative reported deaths in E&W by week compared with the average over 2005 to 2014
2005 to 2014
2015
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Outlook for 2016 valuation assumptions
How should recent experience affect mortality improvements assumption?
Will increase in mortality rates in 2015 prove to be a blip?
Is the slowing of improvements in mortality rates since 2011 a sign of a change in the previous trend?
Initial view:– Don’t currently expect to increase allowance for long-term mortality improvements in
2016 valuation– May be a slight reduction in allowance for improvements in the short-term
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Effect of membership movements
Impact of austerity…– More early leavers than expected– Lower pay growth than assumed– Ageing membership?
Impact of auto enrolment…– Younger membership?
Take up of the 50:50 Scheme…– Lower than expected
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Scheme Advisory Board
Deficit Management Recommendations- Standardised basis result- Transparency (past / future)- Minimum employer contributions- Targeting exit position
KPIs (Benchmarking exercise October 2015)- Risk Management- Funding level and contributions- Deficit recovery- Investment returns
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The Fund’s relative position (published basis)
Hampshire position 2013 Hampshire position 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
£bill
ions
Published Surplus/Deficit 2013 - LH Scale Published Funding Ratio 2013 - RH Scale
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The Fund’s relative position (common basis)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
Surplus 2013 - single basis Published Surplus Funding Ratio 2013 - single basis
Hampshire position Hampshire position
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£mill
ions
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Wider considerations
GAD report under Section 13
(2) … employer contributions to be set at an appropriate level to ensure—(a) the solvency of the pension fund, and(b) the long-term cost-efficiency of the scheme.
(4) Where an actuarial valuation … has taken place, a person appointed by the responsible authority is to report on whether the following aims are achieved—
(a) the valuation is in accordance with the scheme regulations;(b) the valuation has been carried out in a way which is not inconsistent with other valuations under subsection (3);(c) the rate of employer contributions is set as specified in subsection (2).
(6) (a) … the report may recommend remedial steps
Review of Cipfa’s guidance on Funding Strategy Statements (end 2015)
Cost management process
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Cost management process
HMT Cost Management Process
SAB Cost Management Process
HMT Directions 2014 LGPS Regulations 2014
Public Service Pensions Act 2013
Total cost cap – 19.5% of pay 1/3rd employee / 2/3rds employer Allowance for 50/50 option Unchanged commutation assumption
SAB may recommend changes if cost is above/below 19.5%
SAB must recommend changes if cost is 2% of pay above/below 19.5%
HMT process takes precedence
Employer cost cap – 14.6% HMT specified assumptions No allowance for 50/50 option Reduced commutation assumption
No action until 2% of pay collar breached
Consultation with SAB Default process if no agreement
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Abolition of contracting-out
LGPS is “contracted-out” of the second state pension– Members and employers pay lower National Insurance contributions– Scheme must provide benefits above a prescribed level
Single tier state pension from April 2016
Contracting-out will be abolished– Employers will pay higher NICs – 3.4% (c2.3% of pay*)– Members will also pay higher NICs – 1.2% (c0.9% of pay*)– Private sector schemes may amend member benefits/contributions– Public service schemes will not be amended
* Estimate based on sample LGPS fund. Will be highly dependent on employee pay levels
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Questions
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Nick WeaverHead of Pensions, Investments and Borrowing
Hampshire Pension Fund
2014/15 Pension Administration
Update
5 key issues which need to be addressed for the LGPS
• Increasing complexity• Relentless reporting • Demands on resources• Maintaining systems & processes• Pressure on employers
Outside our control …
• Increasing complexity– LGPS addition of CARE – Tax rules getting even more tricky– Wider “promises” (and future potential issues)
• Relentless reporting – Scheme Advisory Board now up and running – Pension Regulator now (officially) involved– GAD extra demands, etc. etc.
What Pensions Services need to do …
• Demands on resources– Ensure we develop suitably skilled people– Prioritise the work – Provide accessible, clear information
• Maintaining systems & processes– Change of system is good for the future
(but been tougher than you would reasonably think!)– Processes need constant review
The Pressure on Employers …
• Austerity measures continue• Pensions are getting more complex• Less chance to “flex” deadlines
(e.g.2016 Valuation data demands & timetable)
• The basis for us working together is the “Administration Strategy” (which has been place for a few years.)
The Administration Strategy …
EOY Returns• With the CARE changes it has been more important
to get it right …than rush it.
• But next year it needs to be on time, for the 2016 Fund Valuation (and shorter ABS deadline)
Active membership
April 201 59% 13,227 24%May 57 17% 5,980 11%June 47 14% 30,955 56%July 37 11% 4,674 9%
342 100% 54,836 100%
Employers
Retirements (Days)
• Some employers are doing a great job !• Delays lead to complaints …. and interest payments !
<-20 -20 to -5 -5 to 0 0 to 5 5 to 10 10 to 20 20 to 40 40 to 60 60 to 90 90 +
197 176 83 50 32 60 37 5 11 12
30% 27% 13% 8% 5% 9% 6% 1% 2% 2%
30% 13% 21% 10%
Deferred Beneficiaries (Days)
• This delay impacts data quality (e.g. FRS17 & Valuation)• Lose touch with people before we know they left
…… which does not bode well for the future !
• We want to avoid fines … but will need to report this to the Panel & Board from 1 April
<-20 -20 to -5 -5 to 0 0 to 5 5 to 10 10 to 20 20 to 40 40 to 60 60 to 90 90 +
70 69 84 101 75 225 289 219 251 1350
3% 3% 3% 4% 3% 8% 11% 8% 9% 49%
15% 8% 11% 67%
How we support you …
– Employer meetings(e.g. Employer Focus Group, HAPOG)
– Employer training(Employer Days for new employers and staff, workshops on specific topics and End of Year training)
– On-line resources(Pensions Matters, Employer Guide, website)
For more information …
Please see:- Website www.hants.gov.uk/pensions- Pensions Matters
0r contact us on:- 01962 845588- [email protected]
Questions
Alison MurrayAon Hewitt
Hampshire Pension Fund
Employer Considerations
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Employer considerations:Grouped funding framework
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Grouping mechanism – what we said last year
303 employers with active members (as at 31 March 2014) 323 as at 31 March 2015
Two groups– Scheduled bodies group– Admission bodies group
Long-standing arrangement to– Smooth contributions– Share risks
Evolving to deal with emerging issues– Differential falls in payroll (LERP) – Outsourcings (particularly to closed employers)
Source for employer numbers: annual report and accounts
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Progress to date – review of the groups
£4,602M
£231M£185M
£83M £19M£13M
Scheduled Body Group
Councils, Police, Fire & PO
Universities
Colleges
Schools
Resolution bodies
Other
Liabilities as at 31 March 2013£5,133M (95% of the Fund)
£28M £2M
£59M£44M
£20M
Admission Body Group
Universities
Transferee ABs
Housing Associa-tions
Community ABs
Independent Schools
Liabilities as at 31 March 2013£153M (3% of the Fund)
28 employers whose contributions are assessed individually
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Recap on grouping mechanism
Experience is shared
-274
268
263
-18
155
-284
48
11
Interest on shortfall
Investment profit
Pay increase profit
Pension increase loss
Contributions paid towards the shortfall
Loss from change in financial assumptions
Profit from change in demographic assumptions
Membership movements and other items
£M
Source: 2013 valuation report
82
Whole of fund experience 2010-2013
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Grouped contributions
Grouped employers pay “average future service rate”
Deficit contributions calculated based on share of group payroll
Layered Employer Recovery Plan– fixes deficit contributions to protect
against falling payroll
Grouping works well where participants are similar
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Initial outcome of review of SBG
All scheduled bodies admit new members Generally publicly funded Some difference in profile e.g. schools/academies and colleges less
mature
Do all scheduled employers still “fit”?
Are they classified exclusively as public sector? Where does their funding come from? How committed are they to the LGPS? How financially secure are they?
– Greater focus on employer covenant (SAB, Cipfa guidance on FSS)
Actively considering HE/FE sector’s participation in SBG
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Initial outcome of review of ABG
Greater variation between employers– Charities, other not-for-profit, commercial organisations – Some material difference in profile – e.g. employers not admitting new
members Scheduled body funding target not appropriate for those with a guarantor
or who can afford a gilts based exit valuation (if no subsuming body) Some employers asking to pay extra contributions
– Individual assessment gives greater control for employers and permits better targeting of funding position on exit
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Actively considering housing associations and education sector employers’ participation in ABG
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Current funding approach / strategy (in theory)
orphan FT scheduled body FT
Strength of funding target
Gilts FT
Stronger – less reliance on
investment returns
Weaker – more reliance on
investment returns
Exit valuations (orphan
liabilities)
Ongoing valuations (admission
bodies - orphan liabilities)
Ongoing scheduled body valuations. Ongoing and exit
valuations for admission bodies with subsumption
commitment
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Gap between funding targets is material
Value of liabilities on different funding targets (as at 31 March 2013)
Difference varies according to employer’s membership profile
* % p.a. as at 31 March 2013
Subsumption Gilts (exit basis) Asset value
Discount Rate* 5.5% 3.2% n/a
Employer A (open) £5.43m £9.57m £4.29m
Employer B (closed) £10.86m £15.14m £8.90m
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Proposal for employers removed from the groups
orphan FT scheduled body FTGilts FT intermediate funding target
Housing associations
Universities, Colleges,
Independent schools
Any changes to contributions need to be carefully managed
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Practicalities and next steps
Removal from group requires notional allocation of assets to employers– Preferred approach is consistent with accounting and exit valuations
Best practice indicates transparency and consultation– Consultation 23 Oct – 20 Nov 2015– Invitation to workshops (Jan 2016) for affected employers– Revised FSS to be considered by the Panel (18 Dec 2015)– Contribution changes will be managed as appropriate– Further communications as part of 2016 valuation exercise
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Questions
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Employer considerations:Employer policy
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What we promised last year - a road map for employers
Ensure the grouping mechanism evolves as required
Enhanced communication / greater transparency – Simple, principles-based admissions policy for
sharing with employers– Review template admissions agreements
(update for 2014 scheme)– Simple principles-based exit policy (standalone
or within admissions policy / FSS) for publication
Pre-planning for the 2016 valuation
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Aim: Clearer, more consistent communication with employers on actuarial issues
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Employers in the Fund
Employer Type 31 March 2013 31 March 2015
Scheduled 120 164
Resolution 51 58
Admitted 97 101
Total 268 323
Source: 2013 valuation and 2014/15 Annual report and accounts
Net increase in admitted bodies allows for a number of exits More admissions in the pipeline
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Key elements of employer policy
Covers admissions and exits
Framework within which administering authority operates– principles-based– linked to funding strategy statement– ensures consistency– identifies different types of employer– focus on managing risk– helpful for administering authority and employers alike
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Employer Policy
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Why are admission bodies in the SBG? Response to new approaches by
letting authorities “Pass through” arrangements
where risk remains with letting authority
Why does this matter? Grouping arrangements mean
risks are shared Adjustments required where
closed employers join Complex and costly unless a
pragmatic approach taken
£4,602M
£231M£185M
£83M £19M£13M
Scheduled Body Group
Councils, Police, Fire & PO
Universities
Colleges
Schools
Resolution bodies
Other
PO is “protected outsourcings”Actuarial speak for admission
bodies
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Employer policy
Existing arrangements remain in place– Power to remove employers from the groups – Power to adopt a intermediate funding target– Focus on protecting other employers
New employers– Admission bodies and wholly owned companies – stand
alone employers (individual contribution rate)– Transferor employer’s contributions may be amended– Town and parish councils – join SBG– New academies – join SBG– Bonds / guarantors will be required where appropriate
Default approach– Closed admission agreement– Subsumption commitment from letting authority– New admission – fully funded
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Employer policy (exits)
Confirms regulatory position*, i.e. exit valuation will be carried out when employer– Ceases to be a Scheme employer– No longer has any active members
Little regulatory flexibility
Funding Strategy Statement sets out how liabilities on exit are calculated
* See Regulation 64 of the LGPS Regulations 2013
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Next steps
Draft Policy will be circulated for consultation Consultation ends 20 November 2015 Policy will be considered by the Panel on 18 December Final policy will be published on Fund website Subject to regular reviews (at least triennially)
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Questions
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