Early retirement strain factors and salary strain review Alex Younger, Investment & Actuarial Services Manager

Transcription

1 Early retirement strain factors and salary strain review Alex Younger, Investment & Actuarial Services Manager

2 Review of Early Retirement Strain Factors following Autumn 2017 Employer Newsletter From 1 April 2018 the Fund has to update its early retirement strain factors. This has cost implications for employers with any scheme members aged 55 or over retiring early because of redundancy or business efficiency or where the employer allows flexible retirement or otherwise waives reductions for early retirement.

3 What is an early retirement strain? Currently, when a scheme member aged 55+ retires early for reasons of redundancy or efficiency, under the scheme regulations they receive immediate payment of the pension they have earned to date. The pension is paid without any actuarial reduction to reflect the fact that payment is being made earlier than their normal retirement date. Their employer is liable for the additional cost of paying benefits early; effectively the extra years of pension that the individual will receive (it is simply more expensive to fund a pension for 25 years than 20). This cost is known as early retirement strain.

4 How are the strain cost factors calculated? The calculation of strain costs is relatively complicated and requires strain factors provided by the Fund Actuary. Given the development of funding assumptions between the 2013 and 2016 formal valuations these factors have been reviewed to ensure that they remain consistent with the overall funding assumptions. This allows employers to better understand the financial impact of early retirements and ensure that appropriate funding provision is made for the additional liabilities generated.

5 Why are the Norfolk Pension Fund strain factors being reviewed now? Usually we would have expected to review these factors closer to the completion of the 2016 valuation BUT there was uncertainty about the impact of the proposed 95,000 public sector exit cap. Had this been implemented as headlined it may well have led to standard factors across the LGPS and thus invalidated the existing requirement for fund specific factors. We then had the general election and its possible regulatory impact. However the Queen s Speech earlier this year announced that no pension legislation was planned so we have now undertaken the necessary review of the factors.

6 What does this mean for employers? Following consideration by the Pensions Committee the new factors will be introduced for all retirements on or after 1 April This will allow employers an appropriate window for planning and mitigating direct financial impact. Estimates requested prepared from 20 October 2017 onwards with a retirement date of 1 April 2018 or later will have the strain costs calculated with the revised factors.

7 Salary Strain Review A significant proportion of the liabilities remain linked to final salary at retirement (benefits accrued by current active members prior to 1 April 2014) The Fund uses a lower salary increase assumption than has been the case historically to reflect downward pressure on pay increases (particularly policy lead freezes and caps in public sector pay increases) Valuation Pay increase assumption was set at Retail Price Index 0.7% (31 March % per annum) An allowance is also made for increases on promotion or progression this is dependent on profile of the scheme membership of an employer (typically between 0.1% and 1.5%)

8 Salary Strain Review cont If a higher pay increase assumption is used then the cost of funding (employer contribution rates) will be higher. But we need a mechanism to check that the real pay experience is reflecting the assumption used at the valuation and a safety valve if it isn t. All employers formally asked to acknowledge this when receiving the results of the 2016 Valuation and their contribution rates for the period 1 April March 2020

9 What does the review do? The Fund actuary reviews on a member by member basis the increase in pensionable pay. If in aggregate for an individual employer the increase is higher that the pay increase assumption plus the allowance for progression/promotion the funding strain is calculated. This is relatively complicated and time consuming work and is based on the data provided in your annual returns to the Fund. The calculation of funding strain is the additional amount required to fund the extra growth in liabilities caused by the increase in pensionable pay above the assumption used.

10 What now? The Fund Actuary has just competed their work and the Fund is reviewing and checking the output. When the internal review is completed we will contact impacted employers in the New Year. Based on the draft results around 70 employers are affected (less than 20% of total). Any questions?