employer forum 2 nd december 20111 welcome and introduction anthony mayer chairman london pensions...

Employer Forum 2nd December 2011 1

Welcome and Introduction

Anthony Mayer Chairman

London Pensions Fund Authority


The LGPSScheme Developments


Mike TaylorChief Executive


Public Sector Pensions -The Main Challenges

• Public and political perception

• Affordability and sustainability

• Life expectancy or longevity

• Inter-generational equity


Public Sector Pensions

• Funded schemes

• 1.7 million actives– Local Government– MPs

• Unfunded schemes (Pay as You Go)

• 3.3 million actives– Teachers– National Health Service– Civil Servants– Police– Fire-fighters– Armed Forces


Clamour for Change – why?

• Slow death of private sector defined benefit pensions

• Unfairness– taxpayers paying for public sector pensions

without equivalent pension rights themselves

• Rising cost, particularly longevity


Government’s priorities

• Reduce the total liability of public sector pensions– Estimated in excess of £1 trillion

• Address the annual structural budget deficit

• Address rising costs


Government action to date

• Independent Public Sector Pensions Commission– Chair, Lord Hutton– Started July 2010– Interim report October 2010– Final report March 2011

• Changed basis of indexation July 2010 (effective from April 2011)– RPI to CPI– Affects pensions in payment– Saves £1.8bn per annum by 2014/15


Government action to date (contd)

• Budget Spending Review (October 2010)– Increases in member contributions from

April 2012– Average 3.2% by 2014/15

• £2.8 billion per annum including £900 million for LGPS

• No increase for lowest paid members

• Review state retirement age


Affordability & sustainability

• All pension funds are sustainable if …– Increase contributions – pay more– Reduce benefits – get less– Increase retirement age – work longer


• Lord Hutton’s report

• “Hutton report welcomed as positive and sensible by London Pensions Fund Authority”

• “Public sector schemes risk collapse with contribution increase”

• “Treasury proposals could break LGPS before Hutton can fix it, LPFA warns”

New public sector pension schemes


Lord Hutton’s conclusions

• Retain defined benefit

• Switch from final salary to career average

• Protect accrued rights

• Increase retirement age

• Review employee / employer balance


Lord Hutton’s conclusions (contd)

• Shared risk and automatic regulation

• Independent scrutiny

• Improved governance

• Abolition of fair deal

• New legislative framework

• Implement by 2015/16


Lord Hutton’s conclusions

for LGPS

• Retain LGPS funded status


Future Local Government Pension Scheme

• Statutory scheme– Career Average, Defined Benefit– Retirement Age raised in line with State

Retirement Age • Now 65• 66 by 2020• 67 by 2026

– Accrual may be 1/60th or lower – perhaps 1/70th

• Other public sector schemes– Similar


Changed Indexation

• RPI to CPI–Already accounted for in valuations–Subject to Judicial Review (Autumn 2011)


Increased Employee Contributions

• No agreement between Treasury, Cabinet Office, Trades Unions

• Major concerns about members opting out– LGPS can be treated differently

• New discussions between CLG, Employers (LGA), Trades Unions

• Consultation on how to implement – Smaller increase in contributions – Reduce benefits by changing accrual rate– Bring forward change in retirement date


Key Issue

Either• Single change

– Merge employee contribution rate issue with implementation of new scheme

– New scheme from April 2014

Or• Two changes

– employee contribution rate rises from April 2012

– New scheme from April 2015


Objectives

• Long term sustainability

• Maintain the fund for future entrants – Prevent mass opt outs


Future Challenges

• Are the new schemes affordable?– Will it last for a generation?

• Retaining membership– Explaining the scheme

• Declining numbers in workforce

• Impact on Investment Strategy

• Ageing population

• Further longevity improvements


Prerequisites for reform

• Comprehensible to scheme members

• A fair pension– Pension seen as key part of members’

pay and reward

• Good communication by employers and administrators


Investment Issues

• Opt outs will lead to rapid maturing of the schemes

• Less scope for investment risk

• More Bonds, Liability Driven Investment strategies

• Less equities, less illiquid alternative assets


Investment Review


Vanessa JamesDirector of Investment


VOLATILE!


The Last Twelve Months

• European Crisis

• US downgraded from AAA debt status, Republicans and Democrats can’t agree on deficit reduction.

• China growing too fast, then too slowly. China asked to help fund Europe’s problems!


European Crisis

• Markets have continued to test inadequate European lender of last resort provisions pushing bond yields higher.

• The scale of the non domestic holding of Italian debt requires more money to guarantee than is even being dreamed of in official European communiqués.


• Politicians are having to take tough decisions that are not in their country’s SHORT term interest and so are not popular

……as a result they are continually behind the curve.

• All asset markets are reacting to the latest piece of news causing high volatility and are growing tired of the politicians lack of decisive action


European Crisis

What needs to be done short term:

1.The ECB(?) must guarantee all deposits in European banks

2.The ESF must gear up to 4x the sizes being spoken of at the moment

3.There needs to be a severe restructuring of debt

4.As well as worrying about deficit reduction, lack of economic growth needs to be dealt with as a priority…….Germany a problem here


European Crisis

What needs to be done longer term:

• Fiscal policy must be closely aligned across those countries in the Euro

• Myriad of possible solutions here

True fiscal integration----------------------only the old DM block

Uncharted territory means an uncomfortable ride and lower growth


Is there any good news?

• The USA is down but not out

• The Far East and South America growing more strongly but growth is slowing here too

• Corporate sector in the best shape.

• Interest rates remain low and QE being repeated.

• The most likely and optimistic economic outcome is muddle through.

• Lower returns expected from all asset classes over the next 3-5 years


What the Fund Holds

Distribution at 30th September 2011:

Asset Class % of Fund

Global and private equity 44

PDF LDI and active bonds 37

Diversified Assets 17

Cash 2

Total 100


So is the Strategy Fit for Purpose?

Fund cash positive for ? Years

• What effect will the proposed increased contributions have on the likely cash flow?

• The Investment Committee will be meeting to re-examine strategy based on new cash flow projections from the actuary once the new contribution rates are agreed


Something for you now

The LPFA fund totalled £3861m on Sept 30th 2010.

Given all that has happened what was the size at the end of September 2011?

- 20% to -10%, -10% to 0, 0 to +10%


Coffee Break and Networking


Employer Covenant Checks

Tony WilliamsEmployer Services Team

Manager



Agenda

• Background• Legal Requirements • Employer Responsibilities • LPFA Checks • Next Steps


Reasons

• Prevent liabilities falling to other employers

• Improve risk management


Causes

• Becoming insolvent

• Changes to Government funding– Grant reductions/grant removal


Legal Requirements

LPFA

• Statutory Duty to maintain and administer the fund for both employers and fund members

• LPFA have a duty of care to look to best protect the pension fund.


Legal Requirements

Employers

• To disclose material events to LPFA under:– The Occupational Pensions Scheme

(Scheme Administration) Regulations 1996


Reportable Events

• Any material change• Matters likely to affect participation. • Change in status

– Take over– Amalgamation, liquidation or receivership– Change in the nature of business – Breach of banking covenant– Cease trading in the UK


LPFA Checks/Controls

• Credit rating report.

• Monitoring companies house.

• Web tracking – Google Alerts.

• Annual Declaration form.

• Engaging with employers.


More Detailed Checks

• Cessation valuation payment plan

• Valuation recovery spread period

• OR when LPFA believe appropriate

CHECKS •Full review of accounts•Additional security


Insolvency

What happens?

• Maximise monies through liquidation process

• Appoint new liquidators to protect fund

• Seek specialist legal advice


Next Steps

• Report to our Board

• Employer updates

• Encourage engagement and participation


Summary

• Background

• Legal Requirements

• Employer Responsibilities

• LPFA Checks

• Next Steps


THERE ARE ALWAYS RISKS

but by all employers working together, we can minimize these!


Automatic Enrolment

Andrew Fleming The Pensions Regulator


Performance Administration Strategy

Mike AllenDirector of Pensions



The Background

• Consultation with employers November 2009 to January 2010

• Employers comments taken on board February 2010

• Final strategy issued and employers signed up April 2010 onwards

• LPFA employer liaison officer appointed


The Reasons Behind the Strategy

• Clarify employer and LPFA roles and responsibilities

• Improved data flows and data accuracy

• Improved service for scheme members

• Preparing for future challenges – new scheme, auto-enrolment, valuation


Has the Strategy been Successful?

• Constructive feedback taken on board by LPFA – improved engagement

• Ability for employers to view on-line forms submitted and progress made

• Improved processing and elapsed times

• End of year error rates reduced significantly

• Contributions paid on time


Facts and Figures

• On line forms submitted:July to September 2009 – 95 formsJuly to September 2011 – 2,400(98%+)

• End of year error rates:Year ending 31/3/10 – 20%Year ending 31/3/11 – 12%

• Contributions paid accurately and on time:April 2011 – 31 (late/inaccurate/no form)October 2011 - 9 (late/inaccurate/no form)


Facts and Figures continued

• Average elapsed time from date of receipt to date of completion:

09/10 10/11 11/12New joiners 23 10 5Early leavers 46 28 23Employer estimates 8 6 6

• Target time from date of receipt of all relevant information to date of completion:

09/10 10/11New joiners 10 2Early leavers 10 8Employer estimates 5 3


What’s Next?

• Encourage use of data match facility

• Reports on performance available on-line at www.yourfund.org.uk

• Employer feedback

• Continued close working through challenging times


Finally

Thank You for all your efforts!!!


Questions

employer forum 2 nd december 20111 welcome and introduction anthony mayer chairman london pensions...

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