social housing pension scheme (shps) employer forums 2015

Social Housing Pension Scheme (SHPS) Employer Forums 2015

Welcome

Agenda

• Welcome – Chair

• Session 1 - Valuation – Paul Coward

• Session 2 - Benefit Changes – Gary Bradley

• Comfort break

• Session 3 - Financial update – Andy O’Regan / Adam

Gregory

• Session 4 - DC update – Andy O’Regan / Gary Bradley

• Open Forum

Session 1 - Valuation

Paul Coward, Trustee Services Manager

Session overview

• Re-cap of valuation

• Funding update – direction of travel

• Accelerated contributions

Re-cap of Valuation

Re-cap of 30 September 2014 valuation

Past service position

2011 2014

Deficit £1,035m £1,323m

Funding Level

67% 70%

Reconciliation as at 30 September 2014

(1,035)

(1,323)

(617)

430

411

215

(54)

(54)

(630)

11

Opening surplus (deficit)

Interest on liabilities

Expected investment return on the assets

Outperformance of investment return on the assets

Contributions (net of expenses) less benefits accrued

Impact of actual salary and inflation increases

Impact of orphans valued on a solvency basis

Changes to assumptions

Miscellaneous

Closing surplus (deficit)

Recovery Plan from 1 April 2016

1.4.16 30.9.20 30.9.23 30.9.26

Tier 1 AVR 2005 £40.6m pa @ 4.7%

Tier 2 AVR 2008 £28.6m pa @ 4.7%

Tier 3 AVR 2011 £32.7m pa @ 3.0%

Tier 4 AVR 2014 £31.69m pa @ 3.0%

Valuation

Other points

Existing – Active DB

Existing – No Active DB (All DC)

From 1 April 2016

• 0.9% of pensionable earnings

• Fixed £x’s amount calculated @ 0.9% of pensionable earnings at switch date

• £1,800 per annum plus

• £70 per DB member

SHPS employer expenses•Basis reviewed to be more equitable

Closed employer loading•Rate reviewed and maintained @ 2.5% of pensionable earnings

Expenses

• Change in method does not increase overall amount recovered by SHPS

• SHPS Committee agrees expense basis with The Pensions Trust

• Expenses covers all non-investment fees including:

Trusteeship Governance Actuarial and legal Pension Protection Fund levy Award winning administration

Funding update @ 30 September 2015

Direction of travel

Where are we now?

Key market indicators 2014 2015

Long dated Gilt yield 3.0% 2.4%

Corporate bond yield 4.0% 3.8%

Market implied inflation rate (RPI) 3.4% 3.2%

Key market indicators

Assumptions 2014Valuation

2015Update

Pre-retirement discount rate 5.9% ?

Post-retirement discount rate 3.3% ?

RPI assumption 3.1% ?

CPI assumption 2.2% ?

Earnings growth assumption 4.2% ?

Investment returns – most material assumptions

•On-going low interest rate environment

•Lower expected rates on growth assets than 2014

•Lower inflation expectation than 2014

Direction of travel @ 30 September 2015

Assumption Expected Impact on Funding Level

Pre-retirement Discount Rate

Post-retirement Discount Rate

Inflation (RPI)

Inflation (CPI)

Increase in Earnings

Mortality

Accelerated contributions

Accelerated contributions

• Response to feedback

• Accelerate payment of deficit contributions

• Discount equal to long term gilt yield at 30 September 2014 (i.e. 3.0%)

• This discount rate will remain until the 2017 Valuation

• Flexibility

– Reduce level of RP payments for term

– Zero window

– Timing

Accelerated contributions

• Payment of £3m will clear regular deficit contributions for period 1 April 2016 to 31 March 2019, plus 62% reduction for month of April 2019

• Full deficit contributions recommence from May 2019

Example A – Zero contribution window

Accelerated contributions

Example B – Reduced payments for 6 years

• Payment of £3m will reduce payments to 54.5% of regular contributions for 6 years from 1 April 2016 to 31 March 2022

• Full deficit contributions recommence from April 2022

Accelerated contributions

• Employer– What funds available?

– Impact on the business?

– Consider

– S75 / future withdrawal likelihood

– Accounting / tax implications

– Plan ahead / allow time

• Process

– Actuarial advice

– Legal agreement

– Costs (actuarial / legal / implementation)

Session 2 – Benefit changes

Gary Bradley, Scheme Manager

Session overview

• Re-cap of benefit changes

• Consultation

• End of contracting out

Re-cap of benefit changes

Benefit changes

• Employer surveys, meetings, feedback and

consultation

• Number of options proposed, two agreed upon

• Changes will be introduced from April 2016

Increase to NRA

• Current NRA is age 65 for all sections of the Scheme

• Increase to age 67 for benefits earned from 1 April

2016 benefits

• Benefits earned before 1 April 2016 will retain NRA

of 65

• Members can still retire at age 65 or earlier, with a

reduction to the benefits earned from 1 April 2016

Decrease to CPI cap

• Revaluation of deferred pensions and increases to

pensions in payment is currently CPI up to 5.0% pa

• For benefits built up from April 2016 the increase

rate will be CPI limited to 2.5% pa

• Where CPI exceeds 2.5% in a given year, a lower

increase will be applied than currently

Future service rates as at 30 September 2014

Valuation 2011 2014 equivalen

t

2014 taking

account of benefit changes

Change+/-

Final Salary

-60th accrual

-70th accrual

-80th accrual

CARE

-60th accrual

-80th accrual

-120th accrual

18.5%

16.0%

13.9%

17.2%

13.1%

8.8%

23.7%

20.4%

17.9%

20.8%

15.7%

10.6%

20.6%

17.7%

15.5%

16.7%

12.6%

8.6%

+2.1%

+1.7%

+1.6%

-0.5%

-0.5%

-0.2%

Future service rates excluding expenses / PPF

Effective from 1 April 2016

Include 0.4% allowance for death-in-service benefits but exclude allowance for expenses and PPF levies.

Additional NI from April 2016 (except 120ths CARE) due to cessation of contracting out

Consultation

Consultation

• The two benefit changes are both ‘listed’ changes

• Obligation is on the employer to consult

• Who does the legislation apply to?

• Legislation around consultation is based on single

employer pension schemes

• A consultation template is available on the Scheme

website to assist you

Consultation – other changes

• You may be considering other listed changes e.g.

increase to member contributions

• Maintaining the member’s salary link on final salary

service

Remains if driven by the employer

Broken if driven by the member

• Employers can move members from a closed section

‘down’ to another closed section

• Employer Form of Authority required by 31 January

2016 or default position applies

Consultation

• Can I take my pre 1 April 2016 benefits at age 65

and my post 1 April 2016 benefits at age 67?

• What is the default position for the CARE sections

because the future contribution rate reduces?

• Does the reduction in the CPI cap apply across all

benefits?

• Why is the early retirement factor lower for the final

salary section?

End of contracting-out

End of contracting-out

• The Government is removing this option from April

2016

• All of the SHPS DB sections are contracted-out, bar

the CARE 120ths

• Both the employer and the member will pay more in

National Insurance contributions

• Current ‘saving’ is 3.4% for employer and 1.4%

member, based on the salary between the lower

earnings level and upper accrual point

End of contracting-out

SalaryAdditional employer National Insurance

Additional member National Insurance

£20,000 £480 £200

£30,000 £820 £340

£40,000 £1,160 £480

£50,000 £1,160 £480

Comfort break

Session 3 – Financial update

Andy O’Regan, Executive Scheme Manager Adam Gregory, Scheme Specific Investment Strategies Manager

Session overview

• FRS102 requirements and modeller

• Financial Assessment and covenant protection

• Investment update

• Late payment of contributions

FRS102 update

FRS102 update

• New accounting standard

• Applies for accounting periods commencing on

or after 1 January 2015

• Earlier adoption is allowed

• Requirement to disclose Net Present Value of

‘deficit contributions’ in accounts

• Previously required, under FRS17, to include

‘withdrawal debt’ figure in notes to accounts

FRS102 update

• FRS102 ‘on-line’ tool developed

• Enables employers to:

Calculate ‘net present value’ of deficit

contributions

Download ‘stream’ of deficit contributions

Save ‘disclosure notes’, for agreement with

auditors and inclusion in year end accounts

• Contact Gary Bradley if you need your code

FRS102 on-line tool: log in

FRS102 on-line tool: inputs

FRS102 on-line tool: output

Disclosure note: scheme level description

FRS102 on-line tool: output

Disclosure note: employer level numbers

FRS102 on-line tool: output

Disclosure note: appendix

FRS102 on-line tool: usage

Financial Assessment

Recent results

Financial assessment and covenant protection – recent

work

Risk Rating Higher Medium Lower Total

2014 (employers)

70 (15%)

17 (4%)

367 (81%)

454

2015 (employers)

74 (17%)

9 (2%)

359 (81%)

442

KPI Results KPI 1 KPI 2

2014 1.21 11.12

2015 1.22 10.58

• For the recent 2015 assessment, Balance sheet strength

(KPI 1) and Affordability (KPI 2) are largely in line with

2014.

Financial assessment and covenant protection – current

issues• Timing Change

• FRS 102

• Affordability focus

• Future accrual

• Forward looking

Other issues:

• Budget impact

Investment update

Investment service (using TPT)

Investment strategy

Current strategy is more robust :

• Reduction in growth assets from 82.5% to 75%

• Growth assets are less exposed to one asset class (equities). Growth assets target a similar level of return but with less volatility

• Greater correlation between assets and liabilities by using Liability Driven Investments (LDI)

Investment strategy de-risking stages

1. Reduce growth assets from 82.5% to 80%

2. Reduce growth assets from 80% to 77.5%

3. Reduce growth assets from 77.5% to 75%

Investment performance

Strong medium term performance

LDI assets led the way as yields fell

Late payment of contributions

Late Payment of Contributions

• Timescales

• Contributions should be received by the 19th of month

following deduction

• In order to meet this date, upload your submission prior to

10th

• Late payment of DC contributions will impact member

benefits

• Late payments in the 9 month period 1/10/14 to 30/6/15

• 406 occurrences of employers paying late

• High occurrence of repeat offenders – always late

• 8 employers have been reported to The Pensions Regulator

and their members informed in writing

Late Payment of Contributions

• Planned changes from 1 January 2016

• Direct Debit will be the only form of contribution collection

• Administrative charges for late payment of contributions

• Action

• Ensure contribution submission submitted before 10th of

month

• Complete Direct Debit Form

Action Administration Charge

Payment received after 19th of month following deduction £250

Contributions 30 days late – letter to the employer £250

Contributions 60 days late – letter to the employer £250

Contributions 90 days late – report employer to TPR and notify all members

£250 plus £2 per member

Session 4 – DC update

Andy O’Regan, Executive Scheme Manager Gary Bradley, Scheme Manager

Session overview

• Investment performance

• Online member access

• Pension freedoms

Investment performance

Default fund – Investment strategy through time

Investment performance

Return Benchmark Difference

2014-16 4.6% 2.0% 2.6%

2026-28 6.6% 3.5% 3.1%

2035-37 8.1% 5.0% 3.1%

2044-46 8.3% 5.0% 3.3%

• Investment return linked to retirement “vintage” • Benchmark is CPI + X (where X ranges from 1% for 2014-16 to

4% for 2044-46 vintage)• Positive figures in the final column therefore indicate successful

outcomes

On-line member access

On-line access

DC on-line member access

• Valuable communication tool

• Interactive

Amend contribution rates

Switch investment funds

Request retirement quote

• Current fund value

• Pension modeller

• Investment funds

On-line access

SHPS DCSHPS DC

On-line access

SHPS DC

On-line access

On-line access

On-line access

On-line access

SHPS DC

State Pension

Pension Freedoms

Pension Freedoms

Pension freedoms

• First announced in March 2014 Budget

• Fully in place from April 2015

• DC members can take part or all of their fund as

cash

• Tax-free element remains at 25% of fund

• Remaining 75% taxed at marginal rate

• A DB member with a transfer value in excess of

£30,000 must take financial advice before

transferring

Story so far

• FCA have produced a report on the first 3 months of

the pension freedoms commencing April 2015

• Over 200,000 pension policies have been accessed

• 12,000 new annuities have been set up

• During the same period in 2013, 90,000 annuities

set up

• It is clear the freedoms have changed the pension

landscape

Our experience

• Majority of DC only funds are being cashed in due to

small size

• SHPS members can use their DC fund to offset

against their DB PCLS (tax-free cash)

• Subsequent drop in new annuities

• An increase in DC transfer-out cases for members

over 60

• Small increase in DB to DC transfers

The Pensions Trust

• Continue to assist members in setting up an annuity

• Allow members to take all their fund as cash

• Will facilitate the transfer of the fund to another

provider for drawdown products

• Is considering the viability of introducing new

products, such as a drawdown facility

• Has amended the default investment fund

Open Forum

Thank you

Thank you for attending

Contact detailsgary.bradley@tpt.org.uk

0113 3942723