Oxfordshire County Council Pension

Fund

2013 Actuarial Valuation

Employer Meeting

alison.hamilton@barnett-waddingham.co.uk

December 2013

Agenda

Purpose of the valuation

How do we do it?

Funding models and assumptions

Valuation Data

Results

Next Steps

2

Purpose of valuations

• Many questions!

Approach depends on question being

asked

• How much do employers need to pay in future to have enough assets to pay benefits?

Ongoing triennial funding valuation

• Help accountants compare

• If we were a plc how much would we need to borrow to finance liabilities?

Annual accounting valuations

(IAS19/FRS17)

• Have we enough assets to meet liabilities?

• How much risk do we leave on the table?

• Different approaches depending on employer situation

Cessation valuations

3

Triennial Funding Valuation

• to certify levels of employer contributions to secure the solvency of the Fund

Set out in LGPS Regulations

• As determined by administering authority

• With some actuarial help!

Also have to look at Funding Strategy

Statement

• Function of Funding Model / investment strategy

• Spreading and stepping

Actuary to “have regard to desirability of maintaining as stable a contribution

rate as possible”

• Statutory/non statutory bodies

• Open or closed admission agreements

Different approaches possible for different

employer types

4

£0m

£20m

£40m

£60m

£80m

£100m

£120m

£140m

£160m

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Year

Total Fund CashflowsPensioners

Deferreds

Actives

How do we do it?

Step 1

• Projection of all possible benefit payments for each member

Step 2

• Attach probabilities to each possible payment to get “expected” payments

Step 3

• Discount “expected” payments to obtain “value”

5

How do we do it?

Look at accrued benefits and future benefits separately

Past Service

• Compare assets with value of accrued benefits

Future Service

• Determine contribution required to meet value of annual accrual of benefits

Calculations completed at

• Whole fund level

• At individual employer level to identify any outliers and for accountants!

But maybe pool similar employers to help with stability

• Price of stability is some cross subsidy

• Complete or partial risk sharing possible

6

Assumptions

Price Inflation (RPI)

• Usually difference between fixed interest and index linked gilts

• CPI adjustment required

Salary Increases

• Usually 1-2% pa more than price inflation

• Short term adjustment?

Discount rates

• Depends on purpose and objectives of valuation

Statistical assumptions

• Investigate past experience

• Use national data

• Adjust for actual experience

7

Assumptions – Inflation RPI

Spot inflation number was 3.60% and the smoothed number was 3.54%

8

Assumptions – Inflation (CPI)

• Formula effect and what’s in the basket

RPI usually more than

CPI

• 0.5% until 2010

• 0.8% since then Formula

effect

• Formula effect only

RPI and CPI “baskets”

expected to converge

• Consistent with CPI swap market

Assumed 0.8% less than RPI

9

Assumptions – Inflation (Pay)

Longer term

• 1% to 1.5% above RPI

Shorter term

• Closer to 1%

• Negative in recent years

Assumed RPI plus 1.0%

• Equivalent of CPI plus 1.8%

• Less than at 2010

Short term overlay

• CPI for next 2 years

10

Discount Rates

Choice of discount rate depends on the question being asked

Funding valuation

• What contributions are required to build up a fund of assets to meet pension liabilities for a given investment strategy?

Accounting valuation

• How much would a corporate body need to borrow to finance their pension liabilities?

Cessation valuation

• How much cash would we need to buy gilts to fund liabilities?

11

Discount Rates

Ongoing funding valuation

• Expected future investment returns from actual investment strategy

Gilts and bonds – easy….

• Redemption yields

Equities – less easy….

• Fixed risk premium over gilts (Gilt + model)

• Economic model (BW model)

Property/alternatives – keep it simple

• Somewhere between equities and gilts

12

Discount Rates / Equity Returns

Gilt Plus models

“Risk based” approach based on alleged tPR approach

• Doesn’t apply to LGPS!

Value liabilities on minimum risk gilts basis

• Increase risk factor via fixed risk premium

• Discount rate then gilts plus something

• Based on asset strategy and employer covenant

• Seems quite sensible and nice and simple

But liability values then behave like gilts

• Potential for lots of volatility

• Equities and gilts not well correlated especially in short term

Problems with quantitative easing

• BoE making pensions “more expensive”

• Government taking an interest

13

Discount Rates / Equity Returns

Our economic model

• Been using and developing for 15 years

• Specifically designed for LGPS

Assumes equity returns function of

• Dividend income plus

• Economic/dividend growth

Returns then risk adjusted

• If more than 75% in equities

• Minimum and maximum real discount rates as well

Valuation results assessed over 6 month period spanning valuation date

• Essentially some smoothing

• Helps meet stability objective

More complex model

• But more robust and stable valuation results

14

Change in Employer Contribution

15

10%

15%

20%

25%

30%

35%Change in Average Employer Contribution

Gilt Based Discount Rate Economic Discount Rate

Gilt and Bond Returns

16

Spot Yield

3.14%

Smoothed Yield

3.27%

Spot Yield

4.03%

Smoothed Yield

4.08%

Equity Returns

17

Spot Yield

3.35%

Smoothed Yield

3.38%

Average of 1% more than RPI pa

Central Assumption of 0% over RPI

Equity Return (Central Assumption)

3.38% + 0.0% + 3.54%= 6.92%

Discount Rates – comparison with

FRS17/IAS19

Accounting Valuations

• Meet requirements of accounting standards IAS19/FRS17

• Discount rate adopted is yield on a high quality corporate bond

Typically lower than ongoing funding valuation discount rate

• Higher total liability for accounting valuations

Comparison with ongoing/accounting valuation

• Expect accounting valuation deficit to be greater than ongoing valuation deficit

New academies

• Deficit shown in our initial academy report based on ongoing valuation assumptions

• Discount rate used is 2010 ongoing funding valuation discount rate updated to reflect market conditions at date of conversion

• Initial academy report deficit generally lower than disclosed FRS17/IAS19 deficit at date of conversion

Financial Assumptions - Summary

19

31 March 2013 31 March 2010

Central Assumptions %pa %pa

6.9% 7.3%

3.3% 4.5%

Bond type investments 3.9% 5.6%

6.0% 5.6%

31 March 2013 31 March 2010

%pa %pa

5.8% 6.7%

Pay Increases Long term 4.5% 5.0%

Short term 2.7% 0% for those over £21,000

3.5% 3.5%

Pension Increases 2.7% 3.0%

Smoothed Investment Returns

Equity type investments

Property type investments

Financial Assumptions

Central Discount Rate

Retail Price Inflation

Gilt type investments

Statistical Assumptions

20

Pre retirement Based on LGPS experience

Post Retirement

mortality

SAPS 1 Tables

Fund specific rating

110%

1.5% pa improvement

factor

Valuation Data - Liabilities

21

Key Stats

Number of Members 2013 % 2010 %

Actives 17,811 33% 17,916 37% 45.3 63.0

Deferred Members 23,306 44% 20,710 42% 44.8 62.6

Pensioners 12,249 23% 10,156 21% 70.1

Total Members 53,366 100% 48,782 100%

£ (000) £ (000) % Change

Actives 291,380 303,539 (4%)

Pensioners 55,885 41,967 33%

£ £ % Change

Actives 16,360 16,942 (3%)

Pensioners 4,562 4,132 10%

Average Age

Average

Retirement Age

This Valuation

Actual Pay/Pensions

Average Pay/Pensions

FT Males

31%

FT Females30%

PT Males

4%

PT Females

35%

Pensionable Pay at This Valuation

Year to March 2013 March 2012 March 2011 TOTAL

£ (000) £ (000) £ (000) £ (000)

UK Equities 552,192 Expenditure Retirement Pensions 52,673 47,949 43,812 144,434

Overseas Equities 500,094 Retirement Lump Sums 11,593 18,513 13,034 43,140

Death Benefits 1,580 1,685 2,028 5,293

UK Gilts 143,913 Leavers benefits 4,215 6,132 6,118 16,465

Corporate Bonds 58,604 Expenses 1,438 4,108 1,509 7,055

Overseas Bonds 29,564 Other Expenditure - - - -

Property 86,589 Total Outgo 71,499 78,387 66,501 216,387

Infrastructure - Income Employees Ctbns 18,671 19,169 20,180 58,020

Commodities - Employers Ctbns 59,735 83,286 65,940 208,961

Other assets 78,330 Transfer Values 5,769 6,725 7,293 19,787

Cash 74,462 Other Income 528 - - 528

Investment Income 14,700 19,514 19,726 53,940

Total 1,523,748 Total income 99,403 128,694 113,139 341,236

New money for investment 13,204 30,793 26,912 70,909

Fund Value

Assets at Start of Year 1,319,994 1,248,106 1,115,415 1,115,415

Cashflow 27,936 50,354 46,800 125,090

Change in value 175,818 21,534 85,891 283,243

Assets at End of Year 1,523,748 1,319,994 1,248,106 1,523,748

Annual Returns

Approx Rate of Return (per annum) 14.4% 3.3% 9.4% 8.9%

Assets at This Valuation £(000)

Revenue

Accounts

Global Equities

69%

Gilts and Bonds

15%

Cash5%

Other11%

Assets and Fund Accounts

22

Intervaluation Experience

23

Intervaluation Experience

Actual Expected

Investment Return 8.9% pa 6.7% pa

Pay Increases** 1.2% pa 2.5% pa

Pension Increases 3.5% pa 3.0% pa

Deaths 844 789

Pension Ceasing £3,319k £3,796k

** includes short term overlay

Valuation Results – Whole Fund

24

Last Valuation This valuation 10% 50/50

Funding Level 79% 82% 82%

Ongoing Cost 14.4% 15.1% 14.1%

Total Rate - 25years

19.0% 20.3% 19.3%

10%

15%

20%

25%

30%

35%

40%

45%

50%

50%

55%

60%

65%

70%

75%

80%

85%

90%

% of PayFunding Level Valuation Results

Individual Employer Results

Based on 2013 payroll, total cash amount increase 1% on average

Mainly due to decrease in discount rate

Size of increase depends on:

• Average age

• Reductions in payroll

• Outsourcings, other new employers

• If 2010 contribution rates were stepped

• If 2010 deficit recovery contribution rates expressed as % payroll or cash amounts

• Experience

• Funding position at 2010

No employer is average

Next Steps

Agree contributions

Final report