LPFA Monthly Solvency Report as at 31 July 2018 Preliminary Month End Data

Transcription

1 LPFA Mnthly Slvency Reprt as at 31 July 2018 Preliminary Mnth End Data Purpse and summary This reprt is prepared fr the LPFA Bard. It prvides an up t date estimate f funding level and sets ut an analysis f LPFA slvency as at 31 July 2018, tgether with an analysis f change frm the end f June It als gives an indicatin f the apprximate sensitivity f funding level t changes in ecnmic and demgraphic assumptins. Net Asset Values and LPFA Asset Mix at 31 July 2018: 31 July 2018 Funds Expsure Plicy Prtfli m % m % Benchmark Minimum Maximum Glbal Equities: 2, % 2, % 45.0% 35.0% 55.0% Private Equity: % % 7.5% 5.0% 15.0% Fixed Incme: % % 2.5% 0.0% 15.0% Infrastructure: % % 10.0% 5.0% 15.0% Credit: % % 9.0% 0.0% 12.5% Real Estate: % % 10.0% 5.0% 15.0% Ttal Return: % % 15.0% 0.0% 20.0% Cash: % % 1.0% 0.0% 5.0% Diversified Grwth Fund: 1 0.0% 1 0.0% N/A N/A N/A Ttal 5, % 5, % 100.0% The 31 July 2018 asset values are based n prvisinal data frm the custdian Bank f New Yrk Melln received n 24 August In the Funds clumns asset data frm Bank f New Yrk Melln has been gruped by asset class. Cash includes the mark t market (MTM) f the currency hedge and the Liability Driven Investment (LDI) prtfli Glbal equities includes cash held in the Insight synthetic equity sub-prtfli The data in the Expsure clumns has been prduced by adjusting the Funds data: Net synthetic equity expsure f 286m has been remved frm the cash line and added t the equities line Cash held in the Insight synthetic equity sub-prtfli has been added t the cash line and remved frm the equities line Derivative mark t market values, the Insight LDI fund and the currency hedge remain treated as being functinally equivalent t cash and included within the cash line

2 The cash line in the Expsure clumns includes the LDI prtfli. As at end July 2018 the LDI prtfli has a m per basis pint interest rate expsure (PV01) and a 1.86m per basis pint inflatin rate expsure (IE01). At 31 July 2018, if interest rate expectatins fall by 0.1% p.a. the LDI prtfli will increase by apprximately 19.1m. If inflatin expectatins fall by 0.1% the LDI prtfli will fall by apprximately 18.6m. The Expsure data and interest rate and inflatin rate expsure f the LDI prtfli have been used t prduce the sensitivity infrmatin n page 6. The LPFA credit prtfli is invested 13% in emerging market debt funds, 21% in direct lending, 33% in debt secured n real assets and the remainder in credit funds. All these investments are unrated. Arund 11% f Public and Private Equity is invested in the UK equity market, with the majrity f equity expsure taken in the United States. LPFA has established a freign exchange hedging prgram t reduce currency risk but verall, after allwance fr that prgram, LPFA is shrt f arund GBP2.4bn, mainly against USD. In the Expsure data, ver July net cash has decreased frm c6% t c1% f the Fund. The apprximate mvements in net cash and cash equivalents are detailed belw: The cash at bank mvements reflect LPFA subscribing a further 175m t the LPPI Credit Pl and 85m t the LPPI Fixed Incme Pl 30 June July 2018 Change ver m m July m Cash and cash equivalents: Cash at bank, custdian and GLA Currency hedge (MTM) Insight LDI prtfli (cash, bnds, swaps MTM) Synthetic Equity: Net synthetic equity expsure Cash held in synthetic equity accunt Risk Expsure Cash Ttal The change in ttal net asset value ver July 2018 is explained as fllws: 5,800 5,700 5,600 5,500 5,400 5,300 5,200 5,100 5,000 4,900 4,800 5,643 Ttal Assets 30 June Asset Perfrmance Asset Bridge ( m) ,724 Cash ut/in LDI MTM Ttal Assets 31 July 2018 There was a cash inflw this mnth due t a bulk transfer in payment

3 Balance Sheet Mdelling (Unsmthed) Triennial Valuatin Basis 31 July June 2018 Estimated liabilities Triennial valuatin basis 5,086m 5,067m Final NAV 5,724m 5,643m Deficit Triennial valuatin basis ( 638m) ( 576m) Estimated Triennial funding level (Barnett Waddingham basis)* 112.5% 111.4% 150 Deficit Bridge (Unsmthed Triennial Valuatin Basis) ( m) Deficit 30 June 2018 Change in Discunt Rate Assumptin Change in Inflatin Assumptin Other items f experience Asset perfrmance Cash ut/(in) LDI MTM Deficit 31 July 2018 Unsmthed 31 July 2018 Triennial valuatin assumptins are supplied by Barnett Waddingham. The discunt rate references the LPFA Fund s lng term plicy prtfli asset allcatin benchmark (see table page 1). During July 2018 the Triennial funding level increased frm 111.4% t 112.5%, due t psitive asset perfrmance. The assumptin fr lng term future RPI inflatin, based n the 20 year pint f the Bank f England implied inflatin curve, remained at 3.5% p.a. The assumed Triennial discunt rate remained at 5.7% p.a. Estimated snapsht f funding level using 2016 Triennial valuatin assumptins updated fr changes in market cnditins, withut smthing.

4 Gilts Flat (Gilts + 0%) Basis At the request f the Bard and given the Fund s inflatin hedge is nw gilts-based, as well as reprting n the Triennial valuatin basis we reprt results n a Gilts Flat basis. Please nte that the primary fcus f the LPFA Bard is t manage the Fund s Triennial balance sheet. 31 July June 2018 Estimated liabilities Gilts Flat basis 9,677m 9,578m Final NAV 5,724m 5,643m Deficit Gilts Flat basis 3,953m 3,935m Estimated funding level Gilts Flat basis 59.2% 58.9% 4,200 Deficit Bridge (Gilts + 0% Basis) ( m) 4,000 3, ,600 3,400 3,935 3,953 3,200 3,000 Deficit 30 June 2018 Change in interest rates Change in inflatin expectatins Other items f experience Asset perfrmance Cash ut/(in) LDI MTM Deficit 31 July 2018 The Gilts Flat funding level increased by 0.3% during July 2018.There was an increase in gilts based inflatin expectatins acrss the curve (see appendix 2) which increased the present value f the liabilities hwever this was ffset by a decrease in gilts based interest rates and psitive asset perfrmance. The increase in liabilities is als reflected in the psitive mark t market mvements experienced n the LDI prtfli ver the mnth. It shuld be nted hwever that the real gilts-based inflatin hedge is designed t hedge inflatin risk in the cntext f the Triennial valuatin basis. This translates t apprximately 11% f the sensitivity f the liability cashflws t changes in gilts-based interest rates and inflatin.

5 Apprximate Risk Sensitivities Unsmthed Triennial Valuatin Basis Gilts Flat Valuatin Basis Equities fall by 10% Assets decrease by 309m decrease by 309m Liabilities decrease by 148m unchanged Deficit increases by 161m increases by 309m Interest rates (swaps and gilts) fall by 1% Assets increase by 240m increase by 232m Liabilities increase by 190m increase by 2,000m Deficit decreases by 51m increases by 1,768m Inflatin rises by 1% Assets increase by 186m (LDI prtfli inflatin hedge nly) increase by 186m (LDI prtfli inflatin hedge nly) Liabilities increase by 219m increase by 2,000 Deficit increases by 33m increases by 1,814m Lng term rate f mrtality imprvement increases by 0.25% Assets unchanged unchanged Liabilities increase by 46m increase by 182m Deficit increases by 46m increases by 182m 10% decrease in member mrtality rates Assets unchanged unchanged Liabilities increase by 134m increase by 382m Deficit increases by 134m increases by 382m Prperty decreases by 10% Assets decrease by 51m decrease by 51m Liabilities unchanged unchanged Deficit increases by 51m increases by 51m Sterling weakens by 10% against all ther currencies Assets increase by 240m increase by 240m Liabilities unchanged unchanged Deficit decreases by 240m decreases by 240m This analysis is based n the LPFA current asset allcatin at 31 July As such, the Triennial sensitivities shwn in the table are slightly incnsistent with the Triennial slvency results shwn earlier. *The analysis cnsiders the apprximate funding level immediately after each event. Apprximate allwance is made fr changes t the assets and future asset class return assumptins used in the discunt rate as a result f the market mvements described. The discunt rate reflects the asset allcatin assuming it has been rebalanced t the allcatin in place immediately befre the event. N allwance is made fr crrelatins between asset classes. The sensitivities shwn wuld be different if the asset allcatin was nt re-balanced fllwing each event. Recmmendatins: [1] LPFA Bard is asked t nte this reprt. Reprt date: 02 Octber 2018 Lead Officer: Tm Richardsn

6 Cmpliance Checks Gvernance issues: The mnthly slvency reprt is prvided t all Bard Members and is published n LPFA s website mnthly. It is a key dcument t track the financial develpment f the fund. Financial implicatins: Implicit in this reprt. Equalities impact: Scheme Members will have the pprtunity t request alternative frmats as required. Scial, envirnmental, health and ethical issues: The mve t greater nline publicatin is in line with LPFA s envirnmental initiatives. Legal implicatins: Nne The prductin f this reprt is vluntary in nature. Cmmunicatin issues: The reprt is published mnthly n the LPFA website. Risk implicatins: This reprt is part f the prcess t manage and mnitr the key investment and financial risks facing the fund. Other relevant / supprting dcumentatin: Nne. This reprt has been prepared fr the LPFA Bard t prvide infrmatin regarding the Fund s slvency. It des nt prvide any advice n legal, taxatin r investment matters and shuld nt be relied upn fr any such r ther purpses. The reprt is prvided as is withut any warranty (express r implied) as t the accuracy r cmpleteness f any infrmatin cntained herein. Neither LPP, its affiliates nr any f their respective emplyees, directrs and fficers shall be liable hwsever t any persn fr any acts and/r missins prclaimed t be based n this reprt r any part theref. This reprt cmplies with Technical Actuarial Standard 100 (TAS100) issued by the Financial Reprting Cuncil.

7 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nv-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nv-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nv-17 Jan-18 Mar-18 May-18 Jul-18 Estimated Funding Psitin 2016 Triennial Valuatin Basis Appendix 1 Funding Level Histry The graph belw shws the estimated Triennial funding level since January % 110.0% 100.0% 90.0% 80.0% 70.0% Estimated Funding Level - Triennial Valuatin Basis (unsmthed) 60.0% Details f the Triennial valuatin assumptins are in appendix 2. Estimated Funding Psitin Gilts Flat Basis The graph belw shws the estimated Gilts Flat Basis funding level prgressin since September Estimated Funding Level - Gilts + 0% Basis 65.0% 63.0% 61.0% 59.0% 57.0% 55.0% 53.0% 51.0% 49.0% 47.0% 45.0% Sep-17 Dec-17 Mar-18 Jun-18 The July Gilts Flat and (unsmthed) Triennial liabilities were calculated using the Barnett Waddingham Valuatins n Demand (VD) system develped fr LPFA. Whilst the funding calculatins allw fr mvements in assets and mvements in liabilities resulting frm changes in interest rates, inflatin and membership infrmatin, the funding update infrmatin must nly be viewed as apprximate.

8 Appendix 2 - Valuatin Assumptins Data The 31 July 2018 liabilities have been calculated using 31 January 2018 membership data. During February 2018 Heywds updated the membership data capture, which has prduced errneus membership data utput. Whilst this prblem is rectified, liabilities will be calculated using the 31 January 2018 membership data. The utput frm VD has therefre been adjusted apprximately t allw fr the annual pensin increase rder effective 31 March 2018 and fr estimated 31 March 2018 renewal data changes. Annual renewal data is nt expected t be reflected in full n the membership database until at least end August 2018 as it is put thrugh a checking and cleaning prcess nce it is received frm the Fund emplyers. Assets The value f the assets used t calculate the funding level are final figures prvided by Bank f New Yrk Melln f net asset value at the mnth end. Estimates f the assets used in prir mnths may be updated nce the assets have been recnciled by the custdian. Assumptins 2016 Triennial Valuatin Basis (updated t reflect market cnditins): Fr the purpse f estimating the funding psitin n the Triennial Valuatin basis the financial assumptins and assets have nt been smthed. Fr the frmal Triennial valuatin f the Fund at 31 March 2016 the financial assumptins and the assets are smthed ver the six mnth perid frm 31 December 2015 t 30 June The unsmthed financial assumptins at 31 July 2018 and 30 June 2018, supplied by Barnett Waddingham were as fllws: 31 July June 2018 Discunt Rate 5.7% p.a. 5.7% p.a. Retail Prices Index Inflatin (RPI)* 3.5% p.a. 3.5% p.a. Cnsumer Prices Index (CPI) Inflatin 2.6% p.a. 2.6% p.a. Lng Term Salary Increases pst % p.a. 4.1% p.a. The asset mix used t calculate the discunt rate is based n the LPFA Fund s plicy prtfli benchmark as detailed n page 1. The demgraphic assumptins are thse used fr the 31 March 2016 Triennial Fund valuatin. Details f the financial and demgraphic assumptins are cntained in Barnett Waddingham s final results paper dated 24 March Gilts Flat (Gilts + 0%) Basis: The liabilities are calculated by discunting expected future cashflws using a gilts yield curve (based n UK gvernment bnds) btained frm the Bank f England website. Retail Price Inflatin (RPI) has been based n the Bank f England UK implied inflatin curve. The CPI assumptin is equal t the RPI assumptin with a deductin f 0.9% per annum. Demgraphic assumptins are thse used fr the LPFA Fund s 31 March 2016 Triennial valuatin. The graphs belw shw the current gilt yield and gilt inflatin curves (used t calculate the liabilities n the Gilts Flat basis) alng with the curves frm June 2018 and the previus Triennial valuatin date, fr cmparisn. The curves nly exist fr duratins up t 40 years and it is assumed that the rates are flat beynd this pint.

9 1Y 3Y 5Y 7Y 9Y 11Y 13Y 15Y 17Y 19Y 21Y 23Y 25Y 27Y 29Y 31Y 33Y 35Y 37Y 39Y 41Y 43Y 45Y 47Y 49Y Rate (%) 1Y 3Y 5Y 7Y 9Y 11Y 13Y 15Y 17Y 19Y 21Y 23Y 25Y 27Y 29Y 31Y 33Y 35Y 37Y 39Y 41Y 43Y 45Y 47Y 49Y Rate (%) 3.00 Gilt Interest Rate Curves (Spt Rates) Mar-16 Jun-18 Jul Surce: Bank f England 4.00 Gilt Implied Retail Price Inflatin Curves (Spt Rates) Mar-16 Jun-18 Jul Surce: Bank f England

10 m Appendix 3 Future Pensin Cashflws Liability Cashflws The graphs belw shws undiscunted expected future liability cashflws. These cashflws allw fr future expectatins f inflatin as assumed in the Gilts Flat Basis. The cashflws if inflatin was 0.1% p.a. higher at all pints alng the curve are als shwn in rder t shw the cashflws sensitivity t inflatin. 400 Liability Cashflws (Gilts Flat Basis) Jul-18 Jul- 18 -inflatin +0.1%