Lothian Pension Fund Annual Seminar

Transcription

1 Lothian Pension Fund Annual Seminar

2 Annual seminar 2014 actuarial valuation principles and results Richard Warden Fund Actuary 4 December 2014 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

3 What are we going to cover? Actuarial valuation basics Main Fund valuation results Setting employer contributions 3

4 Actuarial valuation basics

5 Why do we do a valuation? Compliance with legislation Recommend contribution rates Common rate Individual employer rates Determine money needed to meet accrued liabilities Calculate solvency ( funding level ) Monitor experience vs. assumptions Manage risks to Fund and employers Review the Funding Strategy Statement (FSS) 5

6 The Fund s ultimate objective Structure Liabilities Assets Managers Future outperformance Future contributions Liabilities Assets 6

7 Liability valuation - assumptions Amounts paid and probability of payment Financial Assumptions Inflation Pay increases Pension increases Investment return Consider: Economic outlook Actual Scheme assets Historical pay growth Demographic Assumptions Life expectancy Retirement age and cause Withdrawals Marriage statistics Consider: Population trends Members social status Past Scheme experience 7

8 Differences in longevity Life expectancy from 65: 12.9 years Unhealthy lifestyle postcode Lifestyle Life expectancy from 65: 21.9 years 3.5 years Healthy lifestyle postcode Low affluence Affluence 3 years High affluence Ill health retirement Health 2 years Normal health retirement Manual worker Occupation <1 year Non-manual worker No such thing as a typical member No such thing as an average scheme or employer ource: Club Vita s analysis based on membership as at 31 January Life expectancies shown from age 65, and are based upon Club Vita s baseline longevity calibrated to the period

9 What might we see next? 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s 2050s 2060s Increases in period life expectancy from age 65 in each decade Historic improvements (men) Option A Option B Option C Source: Club Vita s analysis of data from Human Mortality Database. ( 9

10 Valuing a single member 10

11 What does a pension fund look like? Source: Sample LGPS Fund (past service only) 11

12 Main Fund valuation results

13 Main Fund assumptions and experience * Excluding promotional increases ** Salary increases were 1% p.a. for 2011/12 and 2012/13, reverting to 5.1% p.a. thereafter *** Salary increases are 2% p.a. for 2014/15 and 2015/16, reverting to 5.0% p.a. thereafter 13

14 Main Fund valuation results 14

15 Results for employers in the Main Fund Compared to 2011 valuation: Funding levels likely to be slightly lower Cash amounts of deficits likely to be bigger Contribution rates likely to be higher Results will vary significantly between employers Stabilised rates set for long term secure employers (see later) 15

16 Setting employer contributions

17 How calculated Long term goal Employer s share of assets (2014) Employer s liabilities (i.e. asset target to meet all benefits eventually) Pace of funding 17

18 Factors that affect the pace of funding Covenant Maturity term covenant Guarantor? Pooling Open or closed Planning to exit? Close to exit? Guarantor? 18

19 19

20 Stabilised employers

21 Contributions % pay Stabilised contributions Unstabilised contributions Stabilised contributions paid Recognise uncertainty when setting rates 21

22 Contribution stability mechanism 22 Worst case Freeze in rates until 1 April % p.a. / -0.5% p.a. Best case / / / / / /21 22

23 Non-stabilised employers

24 Non-stabilised employers Some large employers with individual rates Contractors (TABs) CABs ineligible for pool membership Three year phasing to new rate Deficit for contractors recovered over lower of working lifetime or contract period Working lifetime used for all other employers Deficit recovery payable by monetary amounts Fund for cessation debt if close to exit (see next slide) 24

25 Heading for exit? 25

26 Small Community Admission Bodies pool

27 Contribution rates for the pool Open to new entrants? No Yes Funding level less than 90% (at 2011 and 2014 valuations)? Funding level less than 80% (at 2011 and 2014 valuations)? No Yes No Yes Closed rate Employers pay the average closed theoretical contribution rate Remedial rate Employers pay their individual theoretical rate until 2017 valuation Open rate Employers pay the average open theoretical contribution rate Remedial rate Employers pay their individual theoretical rate until 2017 valuation 27

28 Any questions? Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

29 Employer Covenant & Funding Strategy Statement

30 Wide Variety of Employers

31 Funding Principles Each employer is responsible for the funding of its own members The cost of the benefits is not known in advance. The approach to funding determines the pace at which employers pay for the benefits.

32 The life of an employer Admission Leaving? Ongoing

33 2011 Actuarial Valuation Employers with individual rates - Large employers - Transferee Admission Bodies Open Pool of small employers Closed Pool of small employers

34 2013 Contribution Stability Mechanism 22 Worst case Freeze in rates until 1 April % p.a. / -0.5% p.a. Best case / / / / / /21

35 To whom? Open employers with individual rates Subject to LPF covenant assessment LPF may seek security if concerns over covenant Subject to agreement from guarantor(s)

36 Who is excluded? Closed and deemed closed employers Transferees Admission Bodies Pooled employers

37 Employer Covenant Non-Financial Indicator RED AMBER GREEN Closed to new entrants Guarantor in place Closed No guarantor Potential (enquiry received) Council agreed to guarantee Guarantor/aligned body covenant strength Other Universities/Colleges Open Signed guarantor agreement Council/Scottish Government Dependency on grant aided funding Wholly Dependent Partially Not dependent Membership numbers Less than 5 actives 5-10 actives Over 10 actives Date last member due to retire Less than 3 years 3-6 years > 6 years Is organisation a TAB? Yes No Survey No response Queries/incomplete Complete survey, no queries Organisational restructure planned Yes No Payroll reduction AV2011-AV2014 Over 10% 5-10% 0-5% Request/Enquiry for cessation valuation Yes No

38 Employer Covenant Financial Indicator RED AMBER GREEN Late payment of contributions 12/13 >1 1 None Contributions over Net Current Assets 2012/13 (if Net Current Assets are positive) >50% >20% and <50% <20% 2011 Valuation Surplus (Deficit) over Pay at 2011 Valuation <-200% >-200% and <-30% >-30% 2013 FRS17/IAS19 Surplus (Deficit) over Pay at AV2011 <-250% >-250% and <-50% >-50% 2011 Gilts Surplus (Deficit) over Pay at AV2011 <-350% >-350% and <-100% >-100% C Net Current Assets / (Liabilities) 2012/13 <0 No Financial Information 0

39 Example 1 Community Admission Body Admitted pre 2007 (no guarantor) Open to new entrants 2014 draft results - Deficit 4m on ongoing basis Covenant rating: Amber Solution: update admission agreement and seek guarantor

40 Example 2 Community Admission Body Admitted pre 2007 (no guarantor) Closed to new entrants 7 members Only 1 active member: Future Working Lifetime - 2 years Covenant rating: Red Solution: Remove from Pool, Fund on gilts basis & potentially remove investment risk

41 Funding Strategy Statement Key policy document Required to review at least every valuation Revised CIPFA guidance produced in 2012 Consultation with employers required

42 Proposed Funding Strategy Changes Contribution stability mechanism Seek to enhance covenant/guarantee for some employers Employers with short duration - fund on gilts basis (c 7m) Implement low-risk investment strategy for certain employers

43 Next steps Communication of individual employer results and contribution rates: by 17 December 2014 Consultation on draft Funding Strategy Statement: until 31 January 2015 Review of admission agreements Ongoing employer covenant assessment

44 Employer Covenant & Funding Strategy Statement

45 LGPS Scotland Governance update Sarah Smart 4 December

46 LGPS Scotland Governance update 1. Background to governance changes 2. Current governance arrangements Lothian Pension Fund 3. New rules 4. Implementation in Lothian Pension Fund 46

47 Background Hutton report: Independent Public Service Pensions Commission (March 2011) Recommended changes for the sustainability of public service pension schemes Included recommendations for governance changes Every public service pension scheme (and individual LGPS fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance. 47

48 Background In Scotland: Guidance from Scottish Public Pensions Agency (SPPA)/SLOGPAG: governance can be strengthened by involving and engaging stakeholders in decision-making, wherever possible, and in maintaining a healthy flow of information around decisions. 48

49 LPF current governance arrangements City of Edinburgh Council Administering authority Pensions Committee body that oversees the administering function on behalf of CEC Council has delegated pension matters to the Committee, whose members act as quasi-trustees Members: 5 elected Councillors, 2 consultative panel members (one employer, one member) Fiduciary responsibility to participating employers, local taxpayers and scheme beneficiaries (SPPA guidance) 49

50 LPF current governance arrangements Consultative panel established to fulfil role of involving stakeholders 12 members (6 employer, 6 member) Act as a sounding board for the Pensions Committee Pensions Audit sub-committee established 2012 Provides assurance over effective and efficient operations 3 PC members, 2 CP members Some stats: 4 largest employers represent c. 75% of scheme liabilities Member split: Active 43% Pensioner 34% Deferred 23% 50

51 LPF current governance arrangements Investment Strategy determined by Pensions Committee Implementation and monitoring delegated to CEC Director of Corporate Governance Supported by an Investment Strategy Panel with 3 independent members Independent Professional Observer appointed March 2013 To assist Pensions Committee with their governance responsibilities to enhance the experience, continuity, knowledge, impartiality and performance of committees or panels (SPPA) 51

52 What do our peers do? Some or all of the following: No member or employer representation on the Pensions Committee No consultative panel Have consultative panel equivalent, but meet separately to the Pensions Committee No Independent Professional Observer Investment strategy and implementation all performed at Pensions Committee level 52

53 New rules Public Service Pensions Act 2013 Applies to ALL public service pension schemes, both funded and unfunded Very high level: establishes requirement for Scheme Advisory Board and Pension Board for each scheme Local Government Pension Scheme (Governance) (Scotland) Regulations 2014 Applies the rules specifically to the LGPS 53

54 Scheme Advisory Board Independent, non-ministerial advisory committee To provide advice to Scottish Ministers, at the Scottish Ministers request, on the desirability of changes to the scheme To provide advice.. to the Scheme managers or the Scheme s pension boards in relation to the effective and efficient administration of [the scheme] Bipartite body: equal number of local government employer and trade union representatives 54

55 Pension Board Responsibilities as laid out in the Act:.responsibility for assisting the scheme manager in relation to the following matters: Securing compliance with the scheme regulations. Securing compliance with requirements imposed by the Pensions Regulator Requires equal numbers of employer and member representatives 55

56 Pension Board draft regulations At least 4 representatives from each side Member representative interpreted as relevant trade union representative Meet at same time and place as the Pensions Committee Very similar to existing LPF consultative panel Pensions Committee Chair chairs joint meetings 56

57 Pension Board draft regulations Remit: to consider any matter concerning pensions it deems relevant to the activities of a Pensions Committee to monitor the investments of the fund and its investment principles and strategy Powers: may requisition a report from the Scheme Manager on any aspect of the fund May request Pensions Committee to review a decision if at least half of the Pension Board agree 57

58 Consultation LPF response Pension Board should be able to include members bringing technical expertise Concept of sides is unhelpful and should be removed: clarify that all PB members work together in the interests of all stakeholders Member representation should not be limited solely to trade union representatives 58

59 LPF implementation of regulations Removal of consultative panel no longer required 2 additional members on Pensions Committee will remain: now directly elected by employers/members Pension Board: 10 members: 5 employer, 5 trade union Clarification that all Pension Board members have a collective duty to all stakeholders Expectation that a sub-committee of the Pension Board will attend the Pensions Audit sub-committee meetings Any requests to review decisions of the Pensions Committee must be received within 7 days 59

60 LPF implementation timetable Pensions Committee and Consultative Panel to discuss proposals: 17 December Nominations for Pensions Committee and Pension Board members: December/January Initial meeting of Pension Board (shadow form) with Pensions Committee: March 2015 First formal meeting of Pension Board under new regulations: June

61 QUESTIONS? 61

62 Other Current Issues Clare Scott

63 Other Current Issues LGPS 2015 Communications Membership Data Quality Customer Satisfaction Internal Investment Team Shared Services Pension Freedom & Choice

64 LGPS 2015 Communications On-line resources for scheme members Modeller coming soon regularly updated 64

65 PowerPoint presentation

66 Member information Member briefings Coming soon /noticeboard news Including: Scheme changes When can I take my pension? How is my pension worked out? poster 66

67 Membership Data Quality What are we doing? PAS Statistical Reporting Meetings Why are we doing this? Improving Performance Improving Member Satisfaction LGPS 2015

68 Employer Online - pensionsweb Authorised contacts Forms Notifications from LPF Guides & bulletins Forthcoming events

69 Monthly Contributions 63 employers submitting monthly LGPS More employers committed to sign up Midlothian Council & CEC in progress

70 Recovery of costs Charges applied for poor performance Contributions received late Addressing membership queries Failing service standards No commitment to submit contributions via Pensions Web by 01/04/2016 Effective from 01/04/2015

71 Customer Satisfaction Employer annual survey results % overall satisfaction with the service provided by the Fund ( from 91%) 94% satisfied with monthly bulletin 94% satisfaction with professionalism and attitude of staff

72 Customer Satisfaction Employer annual survey results % satisfied with website 79% overall satisfaction with pensionsweb 53% rated upload of contributions good/very good 45% rated upload of new entrants good/very good

73 Customer Satisfaction New active member survey Overall service provided was excellent st quarter % ( %) nd quarter % ( %) Rolling year to Sept % ( %)

74 Internal Investment Team External assessment of controls Risk - Lack of specific benchmarking - Short notice periods Solution - Employment via company owned by the Fund

75 Shared Services Joint working with Falkirk Pension Fund for past 2 years New phase of work - Joint UK infrastructure investments - Limited marginal work for LPF staff - Investment staff seconded to Falkirk

76 Pension Freedom & Choice Tax considerations Individual in Defined Benefit scheme at age 55 Individual in Defined Contribution scheme at age 55 Unlock cash via Defined Contribution scheme

77 Other Current Issues Clare Scott

78 Close Clare Scott

79 Actuarial Valuation next steps By 17 December Draft individual employer results - Draft Funding Strategy Statement By 31 January Responses from employers 25 March 2015 Pensions Committee consideration

80 Governance Changes next steps 17 December - Pensions Committee By 31 January Nominations for Pension Board - Nominations for Pensions Committee 25 March 2015 Pensions Committee consideration

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