London Borough of Sutton Pension Fund Page 29 Actuarial valuation - - PowerPoint PPT Presentation

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London Borough of Sutton Pension Fund Page 29 Actuarial valuation - - PowerPoint PPT Presentation

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London Borough of Sutton Pension Fund Page 29 Actuarial valuation as at 31 March 2019 Agenda Item 8 Melanie Durrant, Associate & Actuary Julie Baillie, Actuary 4 June 2019 Agenda Item 8 Agenda Actuarial valuations background

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London Borough of Sutton Pension Fund

Actuarial valuation as at 31 March 2019

Melanie Durrant, Associate & Actuary Julie Baillie, Actuary 4 June 2019

Page 29

Agenda Item 8

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Agenda

  • Actuarial valuations – background
  • Assets
  • Liabilities

– Assumptions – financial – Assumptions – non-financial

  • 2019 Valuation – what to expect?
  • Questions and comments

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

What do we do?

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  • Accumulation of

contributions and investment returns less benefits paid

Assets

  • How much are they

worth?

Valuation

  • Future benefits

paid from the Fund (pensions, lump sums etc)

Liabilities

  • How much do we

need now to pay future benefits? (Contribution rate)

Valuation Value of liabilities less value of assets

Deficit Value of assets / value of liabilities Funding Level

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Types of valuations

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  • Funding level / deficit and set contribution rates
  • New academies / new admission bodies

Funding valuations

  • Brought in to help stakeholders compare

liabilities of companies

Accounting valuations (FRS/IAS)

  • Regulation 64
  • Determine exit payment / credit

Cessation valuations

  • How much money needs to be paid between

Funds in respect of external member transfers?

Bulk transfers

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Triennial valuations – why do we do them

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  • 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!

Have regard to the Funding Strategy Statement

  • Function of Funding Model / investment

strategy

  • Spreading and stepping

Stability of contributions

  • Statutory/non statutory bodies
  • Open or closed admission agreements
  • Employer financial strength (covenant)

Different approaches possible for different employer types Page 33

Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Valuing employer assets

Begin with assets at start of period Increased by contributions paid in Reduced by benefits paid out With an additional gain or loss from Fund investment returns

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

What do we do? - Liabilities

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Assess long term financial risks Assess the probability of benefits being paid Estimate and value future benefit payments Need to apply many different assumptions

How much do we need to pay in advance to afford all these benefit payments?

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

How do liabilities change over time?

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

First project the cashflows…

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2016 2026 2036 2046 2056 2066 2076 2086 2096 2106

Year

Fund cashflows

Pensioners Deferred Actives

Step 1

  • Projection of all possible

benefit payments for each member

Step 2

  • Attach probabilities to each

possible payment to get “expected” payments

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Then you “discount” them back to the valuation date…

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2016 2026 2036 2046 2056 2066 2076 2086 2096 2106

Year

Fund discounted cashflows

Pensioners Deferred Actives

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 present day value

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Our key assumptions

Financial

Discount rate Salary increases Pension increases (CPI)

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Demographic

Mortality Retirement

Commutation

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Discount rate – BW economic model (2016 valuation)

  • Weighted expected future

investment returns from long- term investment strategy (top down approach)

  • Assumptions assessed over six

month period spanning valuation date (smoothed)

  • Specifically designed for LGPS
  • Smoothed returns help stability

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Page 40

Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Real discount rate

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Key assumptions: inflation

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■

Key factors to consider when establishing an inflation assumption:

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Yields on fixed and index-linked gilts

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Inflation expectations (Bank of England)

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RPI or CPI?

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Government policy

Inflation rate (up)

Liabilities (up)

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Key assumptions: mortality

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■

What is longevity risk?

■

Key factors to consider when establishing a mortality assumption:

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Population/ industry experience

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CMI studies

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Scheme experience

‒ Social class ‒ Pension size ‒ Health ‒ Postcode

Life expectancy (up) Liabilities (up)

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting 16

Effect of assumptions

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Longevity experience – average fund

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Reducing cost by around 3% relative to 2016

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

What is the key outcome? - Contributions

Future service contribution rate / Primary rate

  • Cost of next year’s pension earned
  • Employer’s share of cost

Past service contribution rate / Secondary rate

  • Adjustment to primary rate to get the required employer

rate

  • Contribution towards deficit (cash sum or % of pay)

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Primary rate + secondary rate

Total contribution rate

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Funding position – then and now(ish)

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31 Mar 2016 31 Dec 2018 £m £m Smoothed asset value 503 641 Past service liabilities Actives 194 206 Deferreds 140 155 Pensioners 298 342 Total 632 703 Surplus (Deficit) (129) (62) Funding level 80% 91%

  • Estimate position at 31

Dec 2018

  • Basis consistent with

2016 valuation

  • Improved funding

position…

Interim monitoring

  • However….
  • Consider increased prudence in basis
  • Lots of legislative uncertainty
  • External influences

2019 valuation

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting 20

Looking ahead in 2019

We can’t provide an indication of results at this stage

  • Funding model and assumptions to be discussed/reviewed with the Fund
  • Employer circumstances different from Fund as a whole

What we know

  • Returns have been really good (although setback in Q4 2018)
  • Lower expected returns (above inflation) going forward
  • Life expectancy increasing less quickly than previously expected

What we know that we don’t know

  • Changes to assumptions – discount rate in particular
  • Individual employer experience
  • Individual funding strategy and discussions
  • Won’t know until individual results available in October/November 2019

What we don’t know that we don’t know…

  • Usually to do with Government
  • Cost cap management process
  • McCloud judgement on transitional protections

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

2019 valuation timetable – key milestones

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March 2020

Results finalised & valuation report signed off New FSS and ISS in place Contributions start 1 April 2020

Winter 2019/2020

Employer results prepared LB Sutton discuss rates with employers

Autumn 2019

Agree assumptions with LB Sutton Initial results and detailed assumptions paper

Summer 2019

All data sent to BW BW complete initial calculations Audited asset information available

Spring 2019

Timetable agreed, BW meet with Fund Data gathering by LB Sutton (member data and cashflows)

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Current issues (valuation related)

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tPR data requirements McCloud/ review of transitional protections Tier 3 employer review Cost cap management Section 13 Academy review Quadrennial valuations

Keep an eye on our website www.barnett-waddingham.co.uk

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Agenda Item 8

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QUESTIONS

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Agenda Item 8

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Background information

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Section 13

  • Funds can still have their own bespoke funding plan
  • Funding model / assumptions / recovery period etc.
  • But need to keep an eye on s13 valuation
  • Avoid being summoned to the headmaster’s office…
  • Will be an issue for some Funds/employers re affordability / stability of contribution

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An independent review by the Government Actuary’s Department of local LGPS funding valuations and employer contribution rates

Good results for London Borough of Sutton at 2016

  • All green!

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

SAB cost management

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Assessment of the future cost of Scheme benefits

19.5%

  • Slow down in longevity improvements
  • Lower salary increases than costed for

Recent results show the cost of benefits have decreased

  • Improve Scheme benefits
  • Reduce employee contributions

What might they do?

  • 30 Jan – Pause to the cost control mechanism announced
  • Effect of McCloud judgement on transitional protections?
  • Watch this space…

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting 27

But….McCloud

Outcome uncertain and discussions ongoing…

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting 28

When is the next valuation going to be?

Quinquennial ….1989 Triennial 1992 - 2019 Quadrennial 2024?

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Agenda Item 8

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London Borough of Sutton Pension Fund – June 2019 Committee Meeting

Regulatory information

  • The information in this presentation is based on our understanding of current taxation law,

proposed legislation and HM Revenue & Customs practice, which may be subject to future variation.

  • This presentation is not intended to provide and must not be construed as regulated investment
  • advice. Returns are not guaranteed and the value of investments may go down as well as up.
  • Barnett Waddingham LLP is a limited liability partnership registered in England and Wales.
  • Registered Number OC307678.
  • Registered Office: 2 London Wall Place, London EC2Y 5AU
  • Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority and is

licensed by the Institute and Faculty of Actuaries for a range of investment business activities.

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Agenda Item 8

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