2019 Valuation update Norfolk Pension Fund Gemma Sefton FFA 9 July - - PowerPoint PPT Presentation

2019 Valuation update

Norfolk Pension Fund Gemma Sefton FFA 9 July 2019

Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

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Agenda

1. Progress update 2. Valuation basics 3. Assumption setting 4. Next steps

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Progress Update

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Reminder: 2019 valuation timeline

April - June 2019 Data submitted by employers Committee review assumptions September 2019 Employer results reviewed and funding and investment strategy discussed with officers October 2019 Committee review whole Fund results November 2019 Funding Strategy Statement (FSS) drafted Individual employer results prepared and issued Employer Forum FSS consultation started December 2019 Pension committee consider updated FSS January - February 2020 Consultation of FSS and employer rates and policies confirmed Pension committee agree final FSS March 2020 Final valuation report signed off by 31 March Q4 18 – Q1 19 Pre-valuation work:

• Planning
• Data cleansing
• Long term employer modelling

1 April 2020 New contributions start to be paid July 2019 Data cleansed and submitted to actuary July – August 2019 Actuarial calculations processed. Whole Fund results issued

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Valuation basics

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Why we do a valuation

• Calculate employer contribution rates
• Compliance with legislation
• Analyse actual experience vs assumptions
• Review Funding Strategy Statement
• Part of continual ‘health check’ on fund solvency

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How we do the valuation

Actuarial valuation Benefit projections Total liability estimate Contribution Calculations Data for c84,000 members Financial assumptions Demographic assumptions Asset data

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Valuation begins at member level

Lump Sum

Dependant’s Pension

Member’s Pension

40 65 85

Recruitment

Contributions

Expenditure Income Retirement Death

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Valuing all members

50 100 150 200 250 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Pension Amounts (£Millions)

Year from the valuation Pensioner members Deferred Members Active members

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How contributions are set

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Valuation ‘health check’

Benefits earned to date Assets today

Managers

Liabilities Assets

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Approach to setting contributions

Benefits earned to date Assets today Future investment

• utperformance

Future contributions

Managers

Liabilities Assets

Benefits earned in future

Where to draw this line?

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The funding strategy is a balancing act

Cost of benefits Contributions Investment returns

High risk funding strategy

Cost of benefits Contributions Investment returns

Low risk funding strategy

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Risk-based method

‘Success’ ‘Failure’

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Funding strategy – 3 step approach

What is the funding target? How long do we want to give the employer to get to the target? How sure do we want to be that the employer hits the target?

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Risk-based method

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Assumption setting

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Recap: approach to setting contributions

Benefits earned to date Assets today Future investment

• utperformance

Future contributions

Managers

Liabilities Assets

Benefits earned in future

Key decision: Where to draw this line?

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Why do we need assumptions?

Lump Sum

Dependant’s Pension

Member’s Pension

40 65 85

Recruitment

Contributions

Expenditure Income Retirement Death

Salary increases, CARE reval Pension increases Life expectancy

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What assumptions do we need?

Demographic assumptions

• Life expectancy
• Retirement age and cause
• Withdrawals
• Marriage Statistics

Consider: Population trends Members’ social status Past scheme experience Financial assumptions

• Investment return
• Inflation
• Pay increases
• Pension increases

Consider: Economic outlook Actual scheme assets Historical pay growth

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Financial Assumptions

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Discount Rate

• Prudent estimate of future investment returns
• Lower discount rate → more prudence → more reliance on

contributions

• Look at market outlook for returns on asset held by Fund

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Outlook for investment returns – March 2016

Future investment return vs risk

Source: Hymans Robertson ESS model, for indicative information purposes only

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Outlook for investment returns – updated

Future investment return vs risk

Bonds Property Equities Cash PE

Source: Hymans Robertson ESS model, for indicative information purposes only

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Salary growth assumption

Allow for:

• Final salary liabilities running-off – salary growth less important
• Short and long term pay expectations

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Salary growth assumption

Cost of living RPI – as per 2016 assumption Allow for projected run off 2% p.a. until 31 March 2022 RPI - 0.3% Assumption: RPI less 0.3% (RPI less 0.7% in 2016) Final salary ‘run off’ Short term expectations Long term single assumption

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Salary strain risk

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Benefit increases assumption

• Pension increases and CARE/deferred revaluation linked to CPI inflation

(may move to CPIH in future)

• Standard approach – derive expected RPI inflation from markets and

assume an RPI-CPI ‘gap’

RPI vs CPI RPI vs CPIH RPI > CPI RPI < CPI Aassumption: gap of 1.0% (same in 2016)

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Demographic Assumptions

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68 70 72 74 76 78 80 82 84 86 88 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Period life expectancy from age 65

Men Women

Longevity trends – 175 years

Source: Hymans Robertson using data from ONS and Human Mortality Database

Infectious diseases (Respiratory &) Circulatory

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Are life expectancy increases slowing down?

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Longevity: improvements

Most LGPS liabilities – still improving Assumption: use latest improvements model calibrated to Club Vita data

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Mortality improvement by segment

Source: Club Vita analysis of VitaBank experience

Group Annualised mortality improvement (age- standardised) 2000-2005 2005-2010 2010-2015 Population 2.8% (±0.1%) 2.8% (±0.1%) 1.1% (±0.1%) Club Vita 2.4% (±0.5%) 2.8% (±0.3%) 1.3% (±0.4%) Comfortable 2.4% (±1.1%) 2.1% (±0.8%) 2.1% (±0.7%) Making-do 2.2% (±0.8%) 3.2% (±0.5%) 0.9% (±0.6%) Hard-pressed 2.5% (±0.7%) 2.9% (±0.5%) 1.0% (±0.6%)

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What might be driving the slowdown?

Data anomaly?..

Some have questioned if there an anomaly within the population data. Unlikely given the results replicated in Club Vita.

Rise of Dementia

Larger rise in dementia than attributable to ageing population – are current generations more ‘prone’ for some reason?

High-rise 00s

Were the 2000s simply abnormally good e.g. strong investment in health care, drives for social (health) equality?

Cash-strapped Britain

Are funding cuts (supply) impacting health

• utcomes, particularly of older people in an

ageing population (demand)?

Frailty decline

A few harsh winters and flu seasons, each of which trigger frailty decline and premature mortality have merged together.

End of an era

Have we exhausted the era of cardio-vascular improvements with no replacement driver of improvements?

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Fund uses tailored assumptions

Assumption: adopt latest Club Vita longevity curves

High life expectancy Mid life expectancy Low life expectancy

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Differences in longevity

No such thing as a typical member

Affluence 3 years Health 2 years Lifestyle 3.5 years Occupation <1 year Unhealthy lifestyle postcode Low affluence Ill health retirement Manual worker Life expectancy from 65: Life expectancy from 65: Healthy lifestyle postcode High affluence Normal health retirement Non-manual worker

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Other demographic assumptions

Compile data from 40 Funds Compare actual experience over 3 year period with expectations Revise assumptions to reflect

• bserved experience (and any other

wider issues)

• Level of ill health retirements
• Death in service
• Withdrawal
• Proportion married
• Take-up of the 50-50 option
• Salary scale
• Commutation

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Demographic assumptions

Parameter Proposed assumption based on analysis of experience Comment Withdrawal from active service Hymans default Slight increase in rate of withdrawal to reflect recent experience Pre-retirement mortality Hymans default Experience closely in line with assumption at 2016v Ill-health retirement Hymans default Lowered likelihood since 2016v Promotional salary scale Hymans default Experience closely in line with assumption at 2016v Cash commutation Keep at 50% and 75% respectively Experience closely in line with assumption at 2016v 50:50 take-up Lower to 0.2% 5% at 2016v, less members opting to 50:50 scheme than initially assumed

Assumption: adopt the demographic assumptions outlined above

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Employer controlled risks

Employers can input during Funding Strategy Consultation

Issue Early retirement When assumptions change the cost of early retirements changes Ill health retirements Fund seeking to pool ill health retirement risks Salary strain Annual check to ensure pay increases are within the assumption

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Next steps

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The road ahead

June - July 2019 Valuation overview Data cleanse August - September 2019 November - January 2019 March 2020 Whole fund results Employer valuation results Funding Strategy Statement Sign off valuation report

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National issues affecting the valuation

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Summary

Cost cap McCloud case Valuation cycle

• New mechanism to

cap cost of PS pensions for employers

• Results indicated

savings which require benefit improvements

• LGPS in a better

position compared to

• ther PS schemes
• Claim that transitional

pension protections are age discriminatory

• Government refused

leave to Appeal

• May require

transitional protections to be offered to all members

• Move to align local

funding valuations with scheme valuation

• Increase the gap

between valuations from 3 to 4 years

• Permit interim

valuations to offset impact of longer gap

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Recap: cost cap mechanism

Additional member cost

Scheme cost Scheme cost

Baseline

Scheme cost

21% of pay 17% of pay

19% of pay: Target cost for scheme employers

2% of pay “Buffer” Future cost sharing valuation

No change in benefits – employers absorb variation Change in benefits to recover full variation

Additional employer cost

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Results of LGPS Cost Cap

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• SAB benefit changes likely to be included
• Will SAB changes increase scheme costs such that

they are within 2% of buffer?

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• Similar to HMT process but slight differences
• Carried out before HMT valuation
• Initial results show cost saving of c0.5% of pay
• Benefit improvements and contribution rate

changes equal to 1.3% of pay proposed

• Proposed benefit changes included

‒ Removal of Tier 3 IH retirements ‒ Minimum DIS lump sum of £75k ‒ Reduce contribution rates for lowest earners

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But some McClouds on the horizon

Ruling that the transitional protections for members within 10 years of NRA at 2012 in Judges’ and Firefighters’ pension schemes were

• age discriminatory; and
• indirectly sex and race discriminatory

Government appeals the “McCloud case” Court of Appeal rules against the Government What could this mean?

• Transitional protections in ALL public sector schemes unlawful?
• “Level up” benefits for all active members at 31 March 2015?
• Increase in scheme costs? (HMT estimate it may cost £4bn p.a.)

HMT pauses all cost cap valuations & processes SAB pauses LGPS cost cap process Jan 2017 Dec 2018 Jan 2019

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What happens next?

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Impact on 2019 valuation

• Advice note from SAB issued on 14 May 2019*
• What benefit structure to value?

‒

• How do funds manage the risk over benefit structure

uncertainty?

‒ ‒

• Can funds revisit rates after the valuation once the case

is resolved?

‒

• What about crystallisation events (cessation, bulk

transfers)?

‒

* http://lgpsboard.org/images/Other/Advice_from_the_SAB_on_McCloud_May_2019.pdf

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Valuation cycle

• MHCLG published consultation on 8 May 2019*
• Permit interim valuations to help with risk management

2020 Cost Cap Valn

2022 Triennial 2024 Biennial 2028 Quadrennial 2019 Triennial 2016 Triennial 2024 Quadrennial 2028 Quadrennial 2019 Triennial 2016 Triennial OPTION 1 OPTION 2

* https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/800321/LGPS_valuation_cycle_reform_consultation.pdf

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LGPS consultations

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Valuation cycle and management of employer risk

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Valuation cycle and management of employer risk

• 1. MHCLG proposal of flexibility on exit payments
• 2. Pass-through: Consideration of the employer’s

exposure to risk for exit credits

• 3. Further Education Bodies: access to the LGPS limited

for new employees?

2020 Cost Cap Valn

2022 Triennial 2024 Biennial 2028 Quadrennial 2019 Triennial 2016 Triennial 2024 Quadrennial 2028 Quadrennial 2019 Triennial 2016 Triennial OPTION 1 OPTION 2

* https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/800321/LGPS_valuation_cycle_reform_consultation.pdf

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1) Flexibility on exit payments

1

• Consultation on Regulation amendments and statutory Guidance
• Security will be needed and plan will be continually reassessed
• Close to new entrants
• Actives reduce over time
• Shortened time horizon
• Cessation event when last active leaves

2

• No further accrual
• Cessation immediately on gilts basis
• Employer pays and walks away

3

• Cessation deferred
• Continued funding commitment
• Cessation at future point

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• Cessation deferred
• Continued funding commitment
• All liabilities run off at natural cessation
• THIS WILL TAKE A LONG TIME!!

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2) Pass through: Exit credits

• Affects all cessations triggered from 14 May 2018
• Ceasing employers receive funding surplus in cash
• It must be processed within 3 months of cessation date
• Surpluses on some contracts may run into £m’s

(usually due to benevolent market conditions)

• Implications for funds and employers:
• lack of transitional arrangements
• refund is not taxable
• is funding risk truly symmetrical?

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2) How does this work in practice?

Start of contract

£

Assets Liabilitie s

End of contract

• r

Contracto r pays debt

£

Assets Liabilitie s

Awarding authority retains surplus OR Contractor receives surplus

£

Assets Liabilitie s Debt Surplus

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2) Summary: Exit Credits

• MHCLG is proposing to amend the 2013 Regulations

retrospectively

• To require an administering authority to take into account

a scheme employer’s exposure to risk when calculating the value of an exit credit

• If the service provider has not borne any pensions risk, but

has become entitled to an exit credit MHCLG considers that the exit credit should be assessed as nil

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3) Summary: Further Education Bodies

• Proposal to remove obligation to require sixth form

colleges and higher education corporations in England Wales to offer LGPS membership

• Would still be available for the purposes of recruitment

and retention

• Matter for each individual employer to decide
• Those already in employment would retain protected tight

to membership

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New Fair Deal

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New Fair Deal consultation

Best Value Employer

Participate in LGPS (Contractor joins the Fund as an Admitted Body) Participate in Contractor’s Broadly Comparable Scheme

Staff carrying

• ut

service

Current approach – Best Value Directions 2007 OR Fair Deal Employer

Participate in LGPS (Contractor joins the Fund as an Admitted Body) Participate in LGPS (Use “Deemed Employer” route, contractor does not join the Fund)

Staff carrying

• ut

service

Proposed approach – Fair Deal in the LGPS OR

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Cap on exit payments

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Reminder: Early retirement on redundancy or efficiency

What are the associated payments?

• Redundancy payment
• Pension strain payment

paid to the Fund

• Other settlements

A member who is made redundant or leaves on the grounds of business efficiency at age 55 or over must take immediate payment of their LGPS benefits

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Public Sector Exit Payment Cap

£95k Redundancy Payments Other Settlements Pension Strain Exit Payments

• Take deferred benefit (Teacher’s only)
• Pay in cash
• Take a reduced pension

Additionally….

• Limits on re-employment for high earners
• Reduced limits for calculating exit payments:
• New maximum redundancy settlements
• Reduced entitlements near retirement
• Reduced access to retirement options
• Total exit payments to an individual should not exceed £95k
• If they do the employer must reduce any of the elements that make up the exit

payment so as not to exceed £95k

• The exit payment cannot be reduced below any statutory redundancy payment

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Draft implementation

Stage one implementation:

• local authorities; the

UK Civil Service

• the NHS in England

and Wales

• academy schools
• police forces

(including civilian staff)

• Fire and Rescue

Authorities Currently not in scope:

• a number of ‘public

sector’ employers in the LGPS, including further/higher education and sixth form college

• current definition would

also exclude all of the alternative service delivery vehicles, whether they are ‘arms length’, e.g. Community Interest companies

It is the government’s intention that the cap will apply to the whole of the public sector, but is being implemented in two stages.

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Potential impact on LGPS

Examples of roles & real voluntary redundancy schemes:

Trading Standard Manager £44k 20 years Adult Social Care Worker £35k 30 years HR staff £28k 40 Planning Manager £51k 15 years

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Thank you

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The material and charts included herewith are provided as background information for illustration purposes only. It is not a definitive analysis of the subjects covered, nor is it specific to circumstances of any person, scheme or organisation. It is not advice and should not be relied upon. It should not be released or otherwise disclosed to any third party without our prior consent. Hymans Robertson LLP accepts no liability for errors or omissions or reliance upon any statement or opinion.