NORFOLK PENSION FUND Employer Forum: 2010 valuation results

Transcription

1 NORFOLK PENSION FUND Employer Forum: 2010 valuation results John Wright 30 November 2010 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

2 2 Agenda Valuation basics 2010 valuation results Ill health insurance Hutton Review

3 3 What we will cover today Valuation basics What has happened since last time 2010 valuation results Next steps Results not as bad as first feared

4 Valuation basics Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

5 5 Promise now, pay later Lump Sum Expenditure Contributions Member s Pension Dependant s Pension Income Recruitment Retirement Death

6 6 How the fund works Investment income/growth** Employer contributions Employee contributions Benefit payments Pensions Lump sums Transfers in Transfers out * Investments and administration ** Income and growth Expenses*

7 7 Triennial valuation of Fund - purposes Compliance with legislation Recommend contribution rates Common rate Individual employer rate peculiar Assess reserves needed for accrued liabilities Assess solvency ( funding level ) Monitor experience vs. assumptions Actuary must have regard to Funding Strategy Statement (FSS)

8 8 Overview of a valuation Actual cost of a Scheme will depend on the pensions actually paid A valuation estimates how much money will be needed to pay the pensions Estimate is based on assumptions projected amounts of benefit payments projected probability of benefits being paid

9 9 Fund 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

10 10 Discount rate: assumed future investment return Discount rate = 6.1% Gilt yield Outperformance 4.5% 1.6% Discount rate = bond yield plus allowance for expected outperformance

11 Discount rate depends on purpose 48m 35m 40m 28m 6.1% 5.5% 4.5% Assets March 10 Liabilities March 10 Ongoing Liabilities March 10 FRS17 Liabilities March 10 Termination Shortfall on gilts termination basis is higher 11

12 12 Value of Pension Fund Liabilities: How much money do I need today? 30 years 1,000 p.a Capitalised cost ignoring interest = 30,000 Capitalised cost allowing for interest 1 = 14,100 Capitalised cost allowing for interest and inflation 2 = 20,100 1,2 Assume 6% investment return and 3% inflation.. and allow for probability of survival

13 13 Funding approach Funding strategy How prudent? Security/stewardship How risky? How risky? Diversification Investment strategy Consider optimal strategy Contributions Strategy Affordability? Stability? Deficit recovery period? Employer policies

14 Recap: what has happened since 2007 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

15 15 Norfolk Pension Fund Results Liabilities 2,041m Assets 1,891m Deficit 150m Funding Level 93% Future service rate 15% of pay Total employer cost 17.2% of pay

16 16 What has changed since 2007 The Chancellor s budget statement on 22 June Changes in market conditions Experience of the Fund Fewer withdrawals than expected Less ill-health retirements than expected Lower pension increases than expected Salary increases less than expected Investment experience

17 17 Assets stumbled, liabilities grew Source: Hymans Robertson, Navigator, 2007 valuation assumptions, RPI not CPI

18 18 Experience since 2007 valuation Investment returns Return on Assets Actual* Assumed 2007/08-4.0% 6.1% 2008/ % 6.1% 2009/ % 6.1% Mar Mar % 19.4% * includes allowance for cashflows Investment market underperformance increased deficits

19 19 Value today of 100 in 10 years time Future inflation In 10 years 100 grows to Assumed future investment return Zero 100 7% 48 3% 134 7% 65 3% 134 5% 80 How much cash do I need today Higher inflation, lower future investment return, need more cash today

20 Falling yields on inflation proof bonds 2.0% 1.5% 1.0% 0.5% 0.0% 20 31/3/ /5/ /7/ /9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/2010 Lower interest rates, value of liabilities grows

21 21 Funding level (solvency) fell Source: Hymans Robertson, Navigator, 2007 valuation assumptions, RPI not CPI

22 22 Outlook for contributions 35% 30% Future service contribution rate on Ongoing Basis Total contribution rate on Ongoing Basis including past service adjustment spread until 31 March 2027 % of Pensionable Payroll 25% 20% 17.4% 26.9% 15% 16.3% 14.2% 10% 31-Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec-09 Results differ for individual employers Source: Hymans Robertson, Navigator, Staffordshire Pension Fund, 2007 valuation assumptions, RPI not CPI

23 23 Better news this year.. Investment markets strong year to 31 March 2010 Emergency budget on 22 June 2010 Lower pension increases (CPI, not RPI) Lower revaluation for deferreds Pay restraint Hutton review of public service pensions Comprehensive Spending Review on 20 October

24 2010 valuation results Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

25 25 What has happened since 2007? Experience Assumptions Modelling

26 26 Deriving the 2010 assumptions Derived the same way as 2007 Same allowance for out-performance of risky assets Allowance for pay restraint in short term Allowance for CPI Improvements in future life expectancy

27 27 Financial Assumptions (table 1) 31 March March 2007 Financial assumptions Nominal Real Nominal Real Discount Rate 6.1% 2.3% 6.1% 2.9% Salary Increases* 5.3% 1.5% 4.7% 1.5% Price Inflation / Pension Increases 3.8% - 3.2% -... but then adjust

28 28 Financial Assumptions (table 2) 31 March 2010 Financial assumptions Nominal Real Discount Rate 6.1% 2.8% Salary Increases* 5.3% 2.0% Price Inflation / Pension Increases 3.3% - 1% for years 1, 2 and 3

29 29 Results Balance Sheet Valuation Date 31 March March 2010 Past Service Position ( m) ( m) Past Service Liabilities Employees Deferred Pensioners Pensioners Total Liabilities Market Value of Assets Surplus / (Deficit) (150) (486) Funding Level 92.6% 80.0%

30 30 Before the Budget Statement... Valuation Date 31 March March March 2010 pre June Budget with pension increases with salary increases at CPI fixed at 1% for 3 years Past Service Position ( m) ( m) ( m) Past Service Liabilities Employees Deferred Pensioners Pensioners Total Liabilities Market Value of Assets Surplus / (Deficit) (722) (602) (486) Funding Level 72.8% 76.3% 80.0%

31 31 Why has deficit grown? Upwards pressure on contributions Investment market underperformance Low interest rates on inflation proof bonds People living longer Factors that helped contain contributions CPI (in payment and deferment) Pay restraint Later retirement Base mortality Net effect? Bigger deficit, higher contributions

32 32 Main changes to assumptions since 2007 Main changes Details Effect Pension increases CPI, not RPI Revaluation of deferreds CPI, not RPI Pay freeze 1% for three years Longevity improvements Bigger allowance Retirement pattern Retiring later Long term CPI/RPI Higher

33 33 Base Mortality From Vita Norfolk High life expectancy Mid life expectancy Low life expectancy

34 34 Base Mortality From Vita - Glasgow High life expectancy Mid life expectancy Low life expectancy

35 35 Why has deficit grown? Negatives Positives Surplus / (deficit) at last valuation Interest on surplus / (deficit) Investment returns less than expected Salary increases less than expected 41.2 Pension increases less than expected 9 Contributions greater than cost of accrual 30 Change in mortality assumption 25.5 Change in demographic assumptions 58.9 Change in salary growth assumption 56.1 Change in pension increase assumption Change in real salary increase assumption Change from RPI to CPI Other experience items 42.3 Surplus / (deficit) at this valuation

36 36 Results Contribution Rates Valuation Date 31 March March 2010 Total contribution rate % of pay % of pay Future service rate 15.0% 15.7% Past service adjustment (20 year spread) 2.2% 6.7% Total contribution rate 17.2% 22.4%

37 Why do contribution rates vary between employers? Different membership profiles (average age, sex, etc) Different experience Salaries Mortality Ill-health retirements Transfers in and out, e.g. TUPE transfer / outsources Previous contributions paid to recover deficit Previous contributions paid to recover early retirement strains Security/guarantors Different deficit spread periods 37

38 Some example results Deficit repayment Future service rate Deficit repayment Large Council* FE College * Closed Charity 20 years 15 years Future Working Lifetime Contractor Remaining Contract Term 16.1% 14.2% 22.6% 17.6% 15.2m p.a. 529k p.a. 162k -2.0% Total 16.1% m p.a. 19.2% + 529k 22.6% + 162k Results for individual employers will vary 15.6% *Before stabilisation overlay 38

39 Risks and other uncertainties Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

40 Risks and other uncertainties Long term pension fund risks Inflation, life expectancy, investments, maturity Risks for short term and ceasing employers Risk of shortfall payment Spending cuts / reduction in workforce Accelerates maturity, reduced contributions, early retirements Government policy in public service delivery? E.g. More outsourcing? Hutton review of public sector pension schemes Nature of changes and timescale uncertain Spending review: increase in employee contributions in short term 40

41 41 Risks: inflation and longevity matter Inflation and longevity cause problems in the future, not the present Benefit payments shown in green Cash flows do not change with interest rate changes But measured cost of benefit cash flows changes This change affects size of deficit

42 42 Risks: impact of reduction in workforce Early retirements additional pension costs More deferred members Amount of contributions falls Payroll Contributions Cash (% pay) % pay % pay % pay + 5pa = 20 (20%) 80 15% pay + 5pa = 17 (21%) 50 15% pay + 5pa = (25%) Better to express deficit repayments as cash amounts

43 43 Whole Fund 15 years Crossover Sample Fund Results Contributions covers expenditure until 2025

44 44 Whole Fund: 20% reduction in workforce Crossover Contributions cover expenditure only until 2015 Sample Fund Results

45 Mature employer: cashflow negative Contributions not enough to cover benefit payments: need to cash in investments to pay benefits 45

46 46 Mature employers: fewer contributors Less mature employer 50% contributing 50% non-contributing 100 Payroll 20 Liabilities = 5 x payroll More mature employer 40% contributing 60% non-contributing 100 Payroll Liabilities = 8 x payroll Similar deficit, smaller payroll, bigger % of pay contributions needed

47 Contribution strategy Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

48 48 Setting employer contribution rates - considering employer covenant Issues What is risk of employer leaving Fund? What is risk to Fund if employer leaves? Consider Tax-raising powers Type of body Open or closed to new entrants Guarantor in place? Funding position/size of liabilities

49 49 Contribution strategy for long term stability 30 Contributions % pay Theoretical contributions Actual contributions paid Underpay in bad times, overpay in better times

50 Test range of potential long term outcomes 200% 175% 1 in 6 chance Funding Level (%) 150% 125% 100% 75% 50% Median 1 in 6 chance 25% 0% Years from valuation date Check long term objective (full solvency) can be achieved Source: Hymans Robertson LLP, sample fund, based on conditions at 31 October

51 51 Conclude Increases in contributions required But can stabilise increases......without any long term damage to the Fund......ONLY for long term, secure employers

52 52 Contribution strategy Having assessed covenant, how are contributions set? Tax raising bodies: +/-0.5% per annum Non-tax raising scheduled bodies: +1/-0.5% per annum Other employers: reflect individual position and security

53 53 Protecting the Fund in future Monitor pay awards against actuary s assumptions Pay deficit as cash (not % of pay) Insure against poor experience? Tier 1 and Tier 2 ill-health early retirements

54 54 Deficit contributions as cash stabilised employer 2007 valuation FSR = 15.0% 2010/11 contribution rate = 15.4% 2010 payroll = 33m Theoretical 2010 valuation rate = 18.4% Stabilised rates 2011/12 = 15.9% 2012/13 = 16.4% 2013/14 = 16.9% Certified rate 2011/12 = 15.0% + (0.9% x 33m x 1.01) 2012/13 = 15.0% + (1.4% x 33m x 1.01 x 1.01) 2013/14 = 15.0% + (1.9% x 33m x 1.01 x 1.01 x 1.01)

55 Other topical issues Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

56 56 Other issues Hutton review of public sector pension schemes Cap and share impact expected to be minimal

57 57 Conclusions and next steps Results could have been worse Stabilisation for long term, secure Deficit payments as cash Next steps Final Committee approval Finalise Funding Strategy Statement Finalise valuation report New rates for 3 years take effect 1 April 2011

58 Thank you Any questions? Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

59 59 Reliances and limitations This document is provided to our client, Norfolk County Council, in its capacity as Administering Authority to the Norfolk Pension Fund (the Fund ). It has been prepared by Hymans Robertson LLP to provide preliminary results of the formal valuation and asset liability modelling, and describe potential options for changes to Funding Strategy Statement (FSS). The methodologies and assumptions are documented separately. Individual employer results will differ from whole Fund results. This document should not be released or otherwise disclosed to any other party without our prior consent, in which case it should be released in its entirety. Hymans Robertson LLP accepts no liability to any party unless we have expressly accepted such liability in writing. Whilst the results are based on Fund specific information as provided by the Administering Authority and based on the 2010 valuation data, there may be some elements of the analysis which are based on a sample fund (which are highlighted as such).

60 60 Further information This presentation is for information only and does not constitute specific advice. Where specific advice is provided on FSA-regulated insurance products it will be provided by Hymans Robertson Financial Services LLP, which is authorised and regulated by the Financial Services Authority to give such advice. Hymans Robertson Financial Services LLP is an independent adviser able to provide advice across the whole of the market. Hymans Robertson LLP is also authorised and regulated by the Financial Services Authority. The exact terms and conditions of any policy will be governed by the provider literature, which will be issued to employers.

61 61 Hutton review: interim report (7 Oct 2010) Short term Changing benefits makes no difference in CSR period Increase in employee contributions is only thing you can do Long term: boundaries No to status quo No to Defined Contribution (DC) only No to race to bottom No to final salary No to defunding LGPS Final recommendations: Q1 2011

62 62 Hutton review: interim report (continued) Long term: options under consideration CARE, hybrid, overseas models Long term: principles affordability and stability; adequacy and fairness; transparency and simplicity; promoting efficiency Final recommendations: Q1 2011

63 Comprehensive Spending Review: 20/10/10 Chancellor accepts Hutton s interim report No race to bottom, DB has a place in future, new gold standard Increase in employee contribution rate Low earners will suffer no or lower increases Will tariff be known by March 2011? Phased in? Consultation on admitted body status But not in time for Hutton? Other pensions intitiatives Increase in SPA, larger BSP, NEST going ahead Significant reform of pensions likely 63

64 64 Ill Health Early Retirement changes- a reminder Tier 1 an active member is not expected to return to work again- LGPS benefits plus 100% of expected future service Tier 2 an active member not expected to work again for at least 3 years but might return before NRA LGPS pension plus 25% of expected future service Tier 3 an active member might be expected to return to work in 3 years LGPS benefit for limited period- no enhancement.

65 65 Changes to Ill health provision 2008 April 2008 ill health provision changes 3 tier system Ill health retirements can have particularly big impact on medium and small employers Larger employers might want certainty over costs

66 66 Early retirement due to ill-health is costly 10k pa for 12 years = 120k Pension in Payment Extra 10k for 10 years early + 5k pa for 22 years = 210k Ill-heath Enhancement (say 5k) Unreduced Pension in Payment ( 10k) Current Age 55 Age at Retirement 65 Age at Death 77 Note: Illustration above ignores interest and inflation

67 67 Short term, less secure: risk assessment Ongoing Funding Level (%) To be on track in 2013 funding level will be 80% Probability on track in 2013 depends on contributions payable Pay 16% Pay 30% Pay 25% Year 50% More affordable contributions, acceptable level of risk Source: Hymans Robertson. compass modelling

68 Ill-health Liability Insurance (IHLI) for LGPS employers Debbie Falvey Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

69 69 Employer s problem- Case study Tier 1 ill health pension 20,000pa 40 years old 15 years service Salary 30,000 Before the changes 129,000 cost to employer New rules 364,000

70 70 The Solution Covers tier 1 and tier 2 benefits Sum assured = ill-health strain payment Same premium rate for all employers in the Fund In event of claim, strain cost payment made to employer Employer then pays Fund

71 71 How it works Fund Bill for strain payment Strain payment Employer Ill-health insurance Legal and General Sum assured paid to employer

72 72 Benefits: everyone wins? Employer Removes uncertainty Protects small and medium size employers from rare but unaffordable strain cost Premium rates reasonable? Can take IH costs out of certified contributions so no additional cashflow cost Administering Authority Seen to be helping employers Less hassle getting cash for illhealth retirements

73 73 Thank you Any questions?

74 Assess effect of contribution strategy Not stabilised Stabilised Year Year No material impact on funding levels Investment impact dominates Source: Hymans Robertson LLP, compass, sample fund 74