London Borough of Hammersmith and Fulham Pension Fund 2016 - - PowerPoint PPT Presentation

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London Borough of Hammersmith and Fulham Pension Fund 2016 - - PowerPoint PPT Presentation

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London Borough of Hammersmith and Fulham Pension Fund 2016 Valuation Graeme Muir FFA, Partner Barnett Waddingham LLP November 2016 Agenda Purpose of valuations? Where were we 2013? Where are we at 2016? Data Challenges

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London Borough of Hammersmith and Fulham Pension Fund

2016 Valuation

Graeme Muir FFA, Partner Barnett Waddingham LLP

November 2016

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Agenda

  • Purpose of valuations?
  • Where were we 2013?
  • Where are we at 2016?
  • Data
  • Challenges
  • Assumptions
  • Results
  • Next steps

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BACKGROUND

Purpose of valuations?

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Purpose of valuations

  • Answer questions
  • Many questions!

Valuations

  • How much do employers need to pay

in future to have enough assets to pay benefits? Ongoing triennial funding valuation

  • Help accountants compare

Annual accounting valuations (IAS19/FRS102)

  • Long term costs of LGPS / section 13

GAD valuations

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Triennial Funding Valuation

  • to certify levels of employer contributions to secure the

solvency of the Fund and the long term cost efficiency of the Scheme Set out in LGPS Regulations

  • As determined by administering authority
  • With some actuarial help and guidance from CIPFA

Also have regard to the Funding Strategy Statement

  • Function of Funding Model / investment strategy
  • Spreading and stepping

Actuary to “have regard to desirability of maintaining as nearly constant a (primary) contribution rate as possible”

  • Statutory/non statutory bodies
  • Open or closed admission agreements
  • Look at employer financial strength (“covenant”)

Different approaches possible for different employer types

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Funding Strategy Statement

Regulation 58 of the LGPS 2013 Regulations

  • Responsibility of the administering authority
  • Keep under review
  • Consult other parties (mainly employers)
  • Have regard to CIPFA guidance

CIPFA Guidance

  • Transparency
  • Prudent long term view
  • Stability of contributions

Revised CIPFA guidance just issued

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“Administering authorities are reminded that securing solvency and long term cost efficiency is a regulatory requirement whereas a constant as possible (primary) contribution rate remains only a desirable outcome”.

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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”

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WHERE WERE WE IN 2013?

2013 valuation results

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March 2013 valuation results

  • Liabilities of £863m less assets of £716m = deficit
  • f £148m
  • Funding Level of 83%
  • Deficit contributions of 8.3% of Pensionable Pay to

eliminate the deficit over a period of 22 years

  • 13.6% of Pensionable Pay to meet the cost of new

benefits as they are earned from year to year

  • Total rate of 21.9% of Pensionable Pay
  • Contributions for LBHF
  • 13.5% plus £8.1m per annum

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2016 VALUATION CHALLENGES

Where are we in 2016?

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2016 valuation

11 KPIs Employer Cost Cap Consistency Standardised results published New CIPFA guidance

  • n Funding Strategy

Statement Increased transparency and governance Section 13

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Section 13 valuation

“Section 13 to provide for an independent review (by GAD) of the valuation and employer contribution rates to check that they are appropriate and requires remedial action to be taken where that review identifies a problem.”

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  • Have valuations been completed in accordance with the

Regulations?

Compliance

  • Has a Fund’s valuation been completed on a basis “not

inconsistent” with other Funds ?

Consistency

  • Will certified contributions accumulate enough assets to

meet liabilities over an “appropriate” period?

Solvency

  • Are certified rates “enough”?
  • Are employers kicking the contribution can down the road?

Long term cost efficiency

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Summary

Funds can still have their own bespoke funding plan

  • Funding model / assumptions / recovery period etc.

But need to keep an eye on s13 valuation

  • And avoid being summoned to the headmaster’s office…..
  • Will be an issue for some Funds/employers re affordability / stability of

contribution

Some additional complexity expected… Longer term

  • Gravitating to the middle…
  • Everyone will be average
  • No need to compare!
  • The public sector equivalent of the Minimum Funding Requirement?

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DATA USED

Where are in 2016?

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Valuation data

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Market asset valuation as at 31 March 2016 of £856m Average annual return of 7.0% p.a. since 2013

Key membership statistics 2016 2013 2016 2013 2016 2013 Actives 3,949 3,834 26% 26% 47.4 47.0 Deferred pensioners 6,975 6,805 45% 45% 48.0 46.8 Pensioners 4,531 4,384 29% 29% 70.8 69.9 Total 15,455 15,023 100% 100% 54.5 53.6 Key pay/pension statistics 2016 2013 % change 2016 2013 % change Actives 93,659 93,822 0% 23,717 24,471

  • 3%

Pensioners 29,563 27,167 9% 6,525 6,197 5% Total £000 Average £ % of membership Average age Number of members

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FINANCIAL ASSUMPTIONS

Where are we in 2016?

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Setting assumptions

  • Use market indices / yield curves
  • Use 20 year point on curves (duration of Fund

liabilities)

  • Our model uses assumptions assessed over six

month period spanning valuation date (smoothed) to give stability

  • Assets smoothed in a consistent way
  • Start with neutral assumptions (not deliberately
  • ptimistic or pessimistic)
  • Introduce prudence where there is uncertainty
  • The greater the uncertainty, the greater the prudence

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Inflation

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  • 3.3% p.a. is the smoothed 20 year point on the BoE curve
  • 0.9% deduction for CPI to get 2.4% p.a.
  • Long term salary increases of 1.5% more than CPI (1.8% at 2013)
  • Short term salary increases of CPI (until 2020)

As at 31 March 2016

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Discount rate – derivation

  • Ongoing funding valuation so discount rate is…
  • Weighted expected future investment return

from long-term investment strategy

  • Assumptions assessed over six month period

spanning valuation date (smoothed)

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Discount rate – gilts & bonds

  • Straightforward, based on current yields and

credit spreads

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  • 2.4% p.a. from gilts
  • 3.3% p.a. from bonds

As at 31 March 2016

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Discount rate – equities – BW model

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equity return = dividend yield + inflation (CPI) + real capital growth

  • Smoothed dividend yield of 3.8% p.a.
  • plus CPI of 2.4% p.a.
  • plus real capital growth of 1.2% p.a.
  • equals 7.4% p.a.

As at 31 March 2016

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Discount rate - others

  • Property
  • Expect to return between equities and gilts
  • CPI + 3.5% p.a. gives 5.9% p.a.
  • Cash
  • Smoothed 20 year LIBOR swap curve point gives a

rate of 1.8% p.a.

  • Absolute return
  • Based on mandate – inflation / cash plus

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Discount rate – prudence allowance

  • What is prudence?
  • Opposite of rashness…
  • Based on a number of factors:
  • the actual proportion of the liabilities that are the

responsibility of tax raising bodies (or where a tax raising body is providing a guarantee)

  • views on the ability of employers to pay more later if required
  • attitude to risk and risk appetite of the Administering Authority
  • levels of volatility in the assumed asset returns
  • consistency of prudence margin with the 2013 valuation

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  • We propose that an allowance of 0.7% is appropriate

Starting point for 31 March 2016

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Discount rate – combining returns

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Asset class Equities 45% 7.4% 5.0% Property 10% 5.9% 3.5% Absolute return fund – inflation plus 2.5% 10% 5.8% 3.4% Absolute return fund – LIBOR plus 4% 25% 5.8% 3.4% Absolute return fund – LIBOR plus 2% 10% 3.8% 1.4% Expenses (deduction)

  • 0.2%

6.1% 3.7% Prudence allowance 0.7% Proposed discount rate assumption 5.4% 3.0% Neutral estimate of discount rate based

  • n long-term investment strategy

Percentage of Fund Initial proposed assumption (% p.a.) Real (relative to CPI)

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DEMOGRAPHIC ASSUMPTIONS

Where are we in 2016?

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Pensioner mortality assumptions

  • Review of Fund mortality over period 2011 – 2015
  • Now using revised tables
  • Impact best demonstrated using life expectancies

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Small increase in the value of liabilities

Life expectancy from age 65 (years) 2016 mortality assumption 2013 mortality assumption Retiring today Male 24.3 22.9 Female 25.9 25.4 Retiring in 20 years Male 26.5 25.2 Female 28.2 27.7

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WHOLE FUND RESULTS

Where are we in 2016?

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Initial results

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Past service funding position Proposed basis 31 March 2016 £000 Smoothed asset value 851,202 Past service liabilities Actives 255,750 Deferred pensioners 272,224 Pensioners 444,957 Total 972,931 Surplus (Deficit) (121,729) Funding level 87% Primary rate % of payroll Total future service rate 22.8% less employee contribution rate (7.0%) Total primary rate 15.8% Total rate % of payroll Primary rate 15.8% plus deficit recovery over 22 years 6.9% Total rate 22.7% Total rate % of payroll Primary rate 16.1% plus deficit recovery over 21 years 7.2% Total rate 23.3% Total rate % of payroll Primary rate 16.1% plus deficit recovery over 20 years 7.5% Total rate 23.6% Total rate % of payroll Primary rate 16.1% plus deficit recovery over 19 years 7.8% Total rate 23.9%

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Initial results – estimated s13 basis

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Past service funding position Estimated Section 13 31 March 2016 £000 Asset value 856,319 Past service liabilities Actives 253,320 Deferred pensioners 237,587 Pensioners 442,596 Total 933,504 Surplus (Deficit) (77,185) Funding level 92%

Total rate % of payroll Total future service rate 21.8% less employee contribution rate (7.0%) plus deficit recovery over 17 years 6.6% Total rate 21.3% Total rate % of payroll Total future service rate 21.8% less employee contribution rate (7.0%) plus deficit recovery over 20 years 5.8% Total rate 20.5% Estimated Section 13 Basis (17 years) Estimated Section 13 Basis (20 years)

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London Borough of Hammersmith and Fulham

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London Borough of Hammersmith and Fulham 2013 2016 Change Assets (£000s) 633,919 725,770 91,851 Liabilities (£000s) 790,747 877,053 86,306 Deficit (£000s) 156,828 151,283

  • 5,545

Funding Level 80% 83% 2.6% Payroll (£000s) 77,582 72,116

  • 5,466

Future service rate (% of pay) 13.5% 15.5% 2.0% 2016/17 future service contributions (£000s) 9,736 11,185 1,450

2016/17 2017/18 2018/19 2019/20 22 8,101 8,024 8,336 8,660 21 8,101 8,348 8,673 9,011 20 8,101 8,706 9,045 9,397 19 8,101 9,102 9,456 9,824 Recovery period (years) Monetary deficit contributions (£000s)

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Standardised Funding Levels

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Next steps……

Managing contribution increases Special contributions? Asset backed contributions?

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