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Hymans Robertson LLP prepared these PowerPoint slides for the benefit of our client Hertfordshire County Council (“Client”). The slides were prepared for the sole use and benefit of our Client and not for any other party (including those employers who attended the Hertfordshire County Council Pension Fund annual Employer Forum on 7 February 2013); and Hymans Robertson LLP makes no representation or warranties to any party other than our Client as to the accuracy or completeness of the slides.
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Hertfordshire County Council Pension Fund
Barry McKay FFA
7 February 2013
Employers’ Forum
2
Today’s discussion
LGPS Reform
Preparation for the 2013 valuation
Outlook for 2013 valuation Measurement and management
Employer issues
LGPS reform
4
Why reform public sector pensions?
Living longer
Long term sustainability and affordability
Final salary system unfair?
Public / private sector divide
Government short term objective – cashflow on unfunded (PAYG) schemes?
5
Life expectancy increasing faster than SPA
50
55
60
65
70
75
80
85
90
95
100
1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Life expectancy and State Pension Age
Men: Life expectancy from birth Women: Life expectancy from birthMen: Projection of life expectancy Women: Projection of life expectancyMen: SPA Women: SPA
Population life expectancy vs State Pension Age
LGPS costs could continue to increase
6
New LGPS from 2014: funding impact Existing Scheme Proposed New Scheme
Benefit Type Final Salary CARE with CPI revaluation
Accrual Rate 1/60th 1/49th
Retirement Age 65 State Pension Age
Member Contribution Rate
Average 6.5% Full-time equiv. pay
Average 6.5% Actual pay
Vesting Period 3 months 2 years
Accrued rights protected (incl. retirement age, R85, final salary link)
Existing scheme underpin for members within 10 years of NPA (age 65) at 1 April 2012 (“best of”)
Introduction of a “50/50” option to bolster LGPS participation
“Cap and collar” cost control
7
Financial impact on LGPS employers No impact on existing deficits (past service)
Accrued rights to 2014 are protected
Modest savings on new benefits (future service) c1%-2% of pay across whole fund?
Savings will vary by employer: Depends on membership profile Changes to member contributions Take up of “50/50” option
Preparation for 2013 valuation
9
2013 valuation: what employers need to do
1. Liaise with pensions team
2. Data correct and up to date
3. Watch out for communications
4. Consider early warning report
5. Look out for Funding Strategy Statement (FSS) consultation
10
Data submission for the 2013 Valuation
Rely on accuracy of membership data
Administering Authority require information from employers
Changes in membership Correct salaries/contributions paid
Missing/incorrect data could result in: A higher value being placed on future benefit promises A higher contribution rate Additional actuarial fees for you
11
Pensionable Pay: Impact of incorrect data
Example (Active Member)
Sex DOB Service Date
FTE Salary
£
Liability £
M 01/01/1954 01/01/1998 10,000 51,000
M 01/01/1954 01/01/1998 15,000 76,000
12
Valuation timetable
March 2013
New Rates
Payable 2012/Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014
March 2014 December 2013
Preparation for valuation
Data for actuary
Actuary does his sums
Valuation results Consultation on FSS
Finalise employer contributions
Outlook for 2013 valuation
14
Market movements since 2010
80
90
100
110
120
130
140
31 Mar 2010 31 Mar 2011 31 Mar 2012
Sterling total returns of major asset classes (rebased to 100 at 31 Mar 2010)
UK equities (FTSE All Share) Index-linked gilts (FTSE over 15 years) Assumed asset return
15
Sovereign Debt Crisis and the impact on government bond yields
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
FTSE UK Gilts Annual Yield Series (over 15 years) Inflation
16
We are living longer – but local variation
High life expectancy
Mid life expectancy
Low life expectancy
17
New scheme cost differs between employers
-1.5%
Employers
New scheme costs more
Average saving
New scheme saves money
Winners and losers
18
Likely impact of key drivers since 2010
Key driver Deficit Contribution rate Market conditions
Investment returns
Life expectancy
New LGPS 2014
Overall Impact
19
40%
50%
60%
70%
80%
90%
100%
31-M
ar-1
0
30-A
pr-1
0
31-M
ay-1
0
30-J
un-1
0
31-J
ul-1
0
31-A
ug-1
0
30-S
ep-1
0
31-O
ct-1
0
30-N
ov-1
0
31-D
ec-1
0
31-J
an-1
1
28-F
eb-1
1
31-M
ar-1
1
30-A
pr-1
1
31-M
ay-1
1
30-J
un-1
1
31-J
ul-1
1
31-A
ug- 1
1
30-S
ep-1
1
31-O
ct-1
1
30-N
ov-1
1
31-D
ec-1
1
31-J
an-1
2
29-F
eb-1
2
31-M
ar-1
2
30-A
pr-1
2
31-M
ay-1
2
30-J
un-1
2
31-J
ul-1
2
31-A
ug-1
2
30-S
ep-1
2
31-O
ct-1
2
30-N
ov-1
2
31-D
ec-1
2
Fund
ing
leve
l
Estimated funding level from 31 March 2010 to 31 December 2012
74.3%
68.3%
20
Outlook for 2013
Compared against 2010 valuation:
Funding levels likely to be lower
Deficits likely to be bigger
(Theoretical) contribution rates likely to be higher
Results will vary significantly between employers
For 2013 there are lots of moving parts!
Employer issues
22
0
10
20
30
40
50
60
Every employer is different
Source: Hymans Robertson, based on Hertfordshire County Council Pension Fund as at 31 March 2010
Range of employer funding levels
Hot spot
Funding Level
Num
ber o
f em
ploy
ers
23
Assessing employer covenant
Issues Likelihood and impact if employer leaves?
Assessing employer risk Tax-raising powers Type of body (Scheduled, TAB, CAB) Open or closed to new entrants Guarantor in place? Other form of security? Funding position/size of liabilities
24
Next steps
Data submission to the Administering Authority
Pensions reform to be finalised
Increases in contributions required
But can manage contribution increases...
...without any long term damage to the Fund...
...depending on time horizon and financial security
Dialogue essential
Any questions? Thank you
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