BBC Pension Scheme. Actuarial valuation as at 1 April June willistowerswatson.com

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1 BBC Pension Scheme Actuarial valuation as at 1 April June 2017 willistowerswatson.com 1

2 Summary The main results of the Scheme s actuarial valuation are as follows: Technical provisions funding level as at 1 April 2016 has increased to 87.9% (2013: 83.4%) Deficit of assets relative to technical provisions has decreased to 1,769 million (2013: 2,054 million) % 83.4% The recovery plan implemented to address the Scheme s funding deficit is expected to achieve full funding on the technical provisions assumptions by 31 December 2028, which is years following the valuation date (2013: 13 years) ,769m 2,054m years 13 years The rate of BBC contributions required to meet the increase in technical provisions arising from the accrual of future service benefits has increased to 37.6% of pensionable salaries (2013: 23.0%) less members mandatory contributions Contents Summary Introduction Scope Next steps Limitations Introduction Financial assumptions Demographic assumptions Statutory funding objective Contribution requirements Secondary funding objective Cash equivalent transfers Projections and sensitivities Discontinuance Statutory estimate of solvency Relationship between the cost of securing benefits and the technical provisions Projections and sensitivities Additional information Risks Benefit summary Membership data Asset information Statutory Certificate Glossary % % The average member contribution rate as at the valuation date is 6.2% of Pensionable Salaries and therefore the BBC s contribution rate will be 31.4% of Pensionable Salaries Throughout this report the following terms are used: Scheme Trustee BBC Pension Trust Limited Trust Deed & Rules The 51st Deed of Variation of the Scheme s Trust Deed and Rules dated 23 June

3 Introduction Scope This report is the actuarial valuation of the as at 1 April 2016 and I have prepared it for the Trustee and the BBC. As noted in the Limitations section of this report, others may not rely on it. The actuarial valuation is required under the terms of Clause 16.2 of the Trust Deed & Rules and Part 3 of the Pensions Act 2004; a copy of this report must be provided to the BBC within seven days of its receipt. The main purposes of the actuarial valuation are to review the financial position of the Scheme relative to its statutory funding objective and to determine the appropriate level of future contributions. The report explains the financial position of the Scheme at 1 April 2016 using several different measures of its liabilities and how it has changed since the previous valuation at 1 April It also describes the strategy that has been agreed between the Trustee and BBC for financing the Scheme in future and provides projections of the funding position at the expected date of the next valuation. This report and the work involved in the actuarial valuation are within the scope of and comply with the Financial Reporting Council s Technical Actuarial Standards regarding pensions, reporting actuarial information, data and modelling. Next steps The Trustee is required to disclose to members, in a summary funding statement, certain outcomes of this actuarial valuation within a reasonable period. Members may also request a copy of this report. The financial position of the Scheme and the level of BBC contributions to be paid will be reviewed at the next actuarial valuation, which is due to be carried out no later than 1 April In intervening years the Trustee will obtain annual actuarial reports on developments affecting the Scheme s assets and technical provisions. The next such report, which will have an effective date of 1 April 2017, must be completed by 1 April Alison Blay Fellow of the Institute and Faculty of Actuaries Towers Watson Limited, a Willis Towers Watson company 30 June 2017 Watson House London Road Reigate Surrey RH2 9PQ Authorised and regulated by the Financial Conduct Authority Report 1 April 2016.docx 1

4 Limitations Third parties This report has been prepared for the Trustee and the BBC for the purpose indicated. It has not been prepared for any other purpose. As such, it should not be used or relied upon by any other person for any other purpose, including, without limitation, by individual members of the Scheme for individual investment or other financial decisions, and those persons should take their own professional advice on such investment or financial decisions. Neither I nor Towers Watson Limited accepts any responsibility for any consequences arising from a third party relying on this report. Except with the prior written consent of Towers Watson Limited, the recipient may not reproduce, distribute or communicate (in whole or in part) this report to any other person other than to meet any statutory requirements. Data supplied The Trustee bears the primary responsibility for the accuracy of the information provided, but will, in turn, have relied on others for the maintenance of accurate data, including the BBC who must provide and update certain membership information. Even so it is the Trustee's responsibility to ensure the adequacy of these arrangements. I have taken reasonable steps to satisfy myself that the data provided is of adequate quality for the purposes of the investigation, including carrying out basic tests to detect obvious inconsistencies. These checks have given me no reason to doubt the correctness of the information supplied. It is not possible, however, for me to confirm that the detailed information provided, including that in respect of individual members and the asset details, is correct. This report has been based on data available to me as at the effective date of the actuarial valuation and takes no account of developments after that date except where explicitly stated otherwise. Some of the member data (such as date of birth and salary) required for the running of the Scheme, including for paying out the right benefits, is known as personal data. The use of this data is regulated under the Data Protection Act, which places certain responsibilities on those who exercise control over the data (known as data controllers under the Data Protection Act). Data controllers would include the Trustee of the Scheme and may also include the Scheme Actuary and Willis Towers Watson, so we have provided further details on the way we may use this data on our website at The choice of long-term assumptions, as set out in the Scheme s Statement of Principles dated 14 June 2017, is the responsibility of the Trustee, in agreement with the BBC, after taking my advice. They are only assumptions; they are not predictions and there is no guarantee that they will be borne out in practice. In fact I would expect the Scheme s experience from time to time to be better or worse than that assumed. The Trustee and the BBC must be aware that there are uncertainties and risks involved in any course of action they choose based on results derived from these assumptions. 2

5 Introduction Financial assumptions The financial assumptions on which the valuation is based are generally of greater significance than the demographic assumptions. A small change in their relative levels can have a significant effect on the value placed on the estimated benefit outgo and income. used in 2013 The financial assumptions are used to estimate the projected amount of the benefits becoming payable and the likely proceeds from the Scheme's assets (used to set the discount rates). The principal financial assumptions adopted for the technical provisions in 2013, expressed in nominal terms and also in real terms, ie relative to retail price inflation, were: 2013 assumptions Nominal % pa Main financial assumptions: Price inflation (Retail Prices Index) Real + % pa Price inflation (Consumer Prices Index) 2.6 (0.8) Career Average Benefits 2006 (CAB 2006) revaluation Career Average Benefits 2011 (CAB 2011) revaluation 2.4 (1.0) Pension increases - Old Benefits New Benefits 3.1 (0.3) - CAB (1.4) - CAB (1.0) Pay increases (including promotional allowance) 1.0 (2.3) Discount rate for technical provisions - pre-retirement (past service) pre-retirement (future service) post-retirement (current pensioners) post-retirement (future pensioners) Relative to RPI, allowing for compounding in 2016 Following detailed consideration by the Trustee and the BBC, as instructed we have adopted the following assumptions for the 2016 valuation. Price inflation We have assumed that future price inflation, as measured by the Retail Prices Index (RPI), will be in line with the term-dependent breakeven RPI inflation rates as derived by Willis Towers Watson from the difference between nominal and index-linked real gilt yield curves at the valuation date, with a deduction of 0.1% pa at all durations to allow for an inflation risk premium. The purpose of the inflation risk premium is to reflect the view that market expectations of inflation are overstated due to high demand for inflation-linked gilts. The absolute level of assumed price inflation is of less financial significance for most of the Scheme s liabilities than the relationship between it and the other financial assumptions. The main exception to this 3

6 is benefits linked to final pensionable salaries, where the absolute level of price inflation will have more significance than it had prior to 2010 because of the 1.0% pa limit on pensionable salary growth. The other exception is pensions in payment that receive no increases following the recent Pensions Increase Exchange. The single equivalent (or average ) RPI assumption weighted by the liability cashflows at the valuation date is 3.0% pa for technical provisions. We have assumed that future price inflation, as measured by the Consumer Prices Index (CPI), will be 1.0% pa lower than RPI, so the single equivalent assumption is 2.0% pa. Increases in the CPI can be higher or lower than RPI in any given period; however, on average, our best-estimate is that in the longterm, CPI will be 1.0% pa below RPI. Real growth in earnings levels Following the BBC s benefit changes in 2011, the increase to pensionable salary is limited to 1.0% pa for members remaining in the Old and New Benefits sections (ie the final salary sections). Therefore we have assumed that pensionable salary growth for these sections is 1.0% pa (including any promotional element). Pension increases and revaluation These assumptions are term-dependent and have been set having regard to the guaranteed level of increases under the Scheme rules (as summarised below), and to the term-dependent central price inflation assumptions together with the expected variation in inflation around the central assumption. For all sections, there is a minimum pension increase of zero if the relevant measure of price inflation is negative. The assumptions below allow for the impact of both the maximum and minimum increase limits. This means that the increase on average may be different from the underlying inflation assumption in the long term. Old Benefits pensions are guaranteed to increase in payment and deferment in line with RPI up to a limit of 10% in each year. Pension increases have therefore been assumed to be granted in line with the RPI assumption. New Benefits pensions are guaranteed to increase in payment and deferment (subject to statutory minimum checks being applied) in line with RPI up to a limit of 5% in each year. We have assumed that on average New Benefits pensions will increase by around 0.2% pa less than assumed RPI (calculated weighted by the relevant liability cashflows at the valuation date). CAB 2006 pensions are guaranteed to increase in payment in line with RPI up to a limit of 2.5% in each year. We have assumed that on average CAB 2006 pensions will increase by around 1.2% pa less than assumed RPI (calculated weighted by the relevant liability cashflows at the valuation date). CAB 2011 pensions are guaranteed to increase in payment in line with CPI up to a limit of 4% in each year. We have assumed that on average CAB 2011 pensions will increase by around 1.0% pa less than assumed RPI (calculated weighted by the relevant liability cashflows at the valuation date). Each year the BBC and the Trustee jointly consider what, if any, increase to apply to the accrued pension for CAB 2006 and CAB 2011 members who have not yet drawn their benefits. To date, such increases have been in line with RPI for CAB 2006, and in line with CPI (with a limit of 4% pa) for CAB 2011, but this is not guaranteed. For the purposes of this valuation: the revaluation of CAB 2006 benefits is assumed to be in line with the assumed RPI rates; the revaluation of CAB 2011 benefits is assumed to be the same as the assumed pension increases in payment for CAB 2011 as described above. 4

7 Discount rates for valuing liabilities The valuation of the Scheme at 1 April 2013 was carried out on a market based method, which takes assets at their market value on the assessment date and discounts the accrued liabilities by reference to discount rates consistent with market conditions at that date and with the Scheme s asset portfolio. This valuation has also been carried out using a market based method. The 2013 valuation was carried out using a dual discount rate approach which means we discounted the liabilities using a different rate while benefits are in payment (the post-retirement discount rate ) from that while benefits have yet to commence (the pre-retirement discount rate ). This approach anticipates that the asset portfolio will be derisked, but only very gradually (as members retire). For the 2016 valuation, we have changed to a term-dependent approach, which is more closely aligned with the Scheme s planned investment strategy and long-term funding target. This approach allows more explicitly for planned de-risking over time. The discount rates for each year are described as a margin in excess of the full nominal forward gilt yield curve. The margin varies by term and is derived having regard to a prudent estimate of future returns in excess of gilt yields from the Trustee s current and anticipated future investment strategy, and their Journey Plan funding target, based on investment return expectations from time to time. As at 1 April 2016, the discount rate margin in excess of gilt forward rates is assumed to be as summarised below: Period Discount rate margin over gilts % pa 1 April March April December January March April December January 2029 onwards 0.60 The assumed dates and levels of de-risking underlying the discount rates in the table above reflect detailed analysis provided to the Trustee in relation to their long-term funding target, which has been shared and agreed with the BBC. In practice, the actual patterns of de-risking may differ. Weighting by the Scheme s liability cashflows at the valuation date leads to an average discount rate margin over gilts as at 1 April 2016 of 1.0% pa, giving a single equivalent (average) discount rate as at 1 April 2016 of 3.2% pa. Prudence There is a relationship between the level of prudence underlying the discount rates and the covenant of the sponsoring employer (ie its ability and willingness to fund the scheme). The weaker the covenant, the more prudent (ie lower) the discount rate assumptions tend to be, leading to higher values for technical provisions. The reason for this is that if a sponsoring employer is very weak, the trustees need to be aiming for a very high degree of security and hence a relatively large fund, because the sponsoring employer may not be able to make further payments after some future date. The advice received by the Trustee is that the BBC s covenant is broadly similar to the level assessed in The above assumptions for discount rates are, I believe, prudent ones in the context of the BBC s covenant, which the Scheme may reasonably expect to achieve or exceed. There might well be periods when actual investment returns fall well short of the funding assumptions. Inevitably such periods of lower than expected investment returns will result in financial strains for the Scheme. The Trustee has considered the possible variation around the expected outcome as part of the valuation and the Asset Liability Modelling exercise that was carried out in conjunction with the valuation. 5

8 The assumed returns, and the level of prudence which they represent, reflect the current planned investment strategy. If this strategy were to change, it would be necessary to review the returns assumed, which in turn could affect the resulting contribution requirement. For example, a reduction in return-seeking investments in excess of that under the current Journey Plan might well warrant a lower assumed return, which would increase the immediate contribution requirement. Expenses An allowance of 100 million is included in the technical provisions in respect of administrative and other non-investment related expenses. With administration expenses (excluding the PPF levy) currently running at over 4 million a year, this reserve (with interest thereon) should be sufficient to meet administration expenses for over 20 years from the valuation date. In addition, the BBC is responsible for reimbursing the Trustee for the amount of the PPF levies. It is assumed that investment management costs are to be met out of future investment income and so the valuation discount rates are net of such costs. Lump sums payable on death in service are currently insured and the premiums are met by the Scheme; the cost of these premiums is included in the calculation of the joint future service contribution rate. Summary of 2016 financial assumptions A summary of the financial assumptions adopted for the technical provisions and future service contributions as at 1 April 2016 is set out below. All assumptions (other than pay increases, where a fixed rate is used) are shown as single equivalents to the full term-dependent curve, weighted by the relevant liability cashflows at the valuation date; in practice, the calculations are based on the full term-dependent curve: 2016 assumption Nominal % pa Real + % pa Discount rate Price inflation (Retail Prices Index / RPI) Price inflation (Consumer Prices Index / CPI) 2.0 (1.0) Pay increases (including promotional allowance) 1.0 (2.0) + Relative to RPI, allowing for compounding 2016 assumption Approximate margin relative to RPI assumption as at 1 April 2016* % pa Pension increases - Old Benefits (in payment and deferment) - - New Benefits (in payment and deferment) (0.2) - CAB 2006 (in payment) (1.2) - CAB 2011 (in payment) (1.0) Revaluation - Career Average Benefits 2006 (CAB 2006) - - Career Average Benefits 2011 (CAB 2011) (1.0) *weighted by the relevant liability cashflows at the valuation date 6

9 Demographic assumptions The demographic assumptions are used to estimate when benefits will come into payment, for how long they will be paid, and to whom. With the exception of mortality, the demographic assumptions are generally of less financial significance than the financial assumptions, in the context of the calculations for this valuation. I have analysed the demographic experience of the Scheme over the three year period since the previous valuation as at 1 April 2013, and over the six year period since the 1 April 2010 valuation for the purpose of setting the mortality base tables. On the basis of this analysis, I have reviewed the assumptions used in the funding plan. A description of the findings and the assumptions adopted on this occasion is set out in the following paragraphs and an illustration of the rates used is shown in the Statement of Principles dated 14 June Mortality The mortality assumptions comprise two elements: the base tables these provide a prudent estimate of Scheme members life expectancies, as at the current date (in the absence of any further improvements); and the allowance for future improvements these are based on the latest available data and projection methodologies. Base tables Over the last few years, general experience nationally has shown an increase in the number of deaths and greater volatility in experience from year to year. To set funding assumptions as part of the valuation process, we analyse the actual experience of Scheme members dying and compare this to a range of standard mortality tables to choose mortality base tables that best fit the Scheme s recent experience. To reduce the potential impact of the volatility observed nationally on the selection of the funding assumptions we have used a six year period rather than the usual three year period to smooth recent experience. Since the 2013 valuation, new standard mortality tables (SAPS 2) have been published, which are a better fit for the Scheme experience over the period analysed and therefore we have used these for the 2016 valuation, rather than the SAPS 1 tables used for the 2013 valuation. We completed our analysis separately for male pensioners and combined female pensioners and dependants (the group of male dependants is small and was therefore ignored). The analysis showed that there were more deaths than expected at the previous valuation for both men and women. This is in line with general experience nationally. We have therefore adopted base tables for both men and women that reflect an assumption that they will not live quite as long as previously assumed. Allowance for future improvements For the 2013 valuation, we used the updated CMI 2012 Core Mortality Projection Model with long-term rates of improvement of 1.5% pa for men and 1.25% pa for women. For the 2016 valuation, we have used the updated CMI 2015 Core Mortality Projection Model to 2013, and CMI 2016 Core Mortality Projection Model with a smoothing parameter of 8.0 from 2013, with long-term rates of improvement of 1.5% pa for both men and women. Using a smoothing parameter of 8.0 in this model (rather than the default 7.5) has the effect of adjusting it to give slightly less weight to recent heavier mortality experience and smooth out changes in mortality trends to a greater extent. In our view: the recently released CMI 2016 Core Projection model represents a reasonable best estimate for future mortality improvement assumptions; 7

10 using a smoothing parameter of 8.0 is a reasonable adjustment to this model; the proposed long-term rates are sufficiently (but not overly) prudent by reference to current market research and national trends. Summary The Trustee and the BBC have agreed to adopt the post-retirement mortality assumptions summarised below. The SAPS 2 ( S2 ) All Pensioners base tables have been used for men and women, with the following subsets and multipliers: Men Women Subset of All Pensioners tables used Light All Multiplier 111% 89% The above base tables and multipliers are applied with mortality improvements from 2007 based on the CMI 2015 Core Mortality Projection Model to 2013, and CMI 2016 Core Mortality Projection Model with a smoothing parameter of 8.0 from 2013, with long-term rates of improvement of 1.5% pa for both men and women. The life expectancy assumptions from age 60 adopted in 2013 and 2016 are summarised in the charts below. Men aged 60 Men aged Women aged 60 Women aged The reduced assumed life expectancy results in a reduction to the liabilities. We have used the above mortality assumptions for death in deferment and after retirement. We have retained the same assumptions as in 2013 relating to the deaths of active members whilst in service. Withdrawals The experience analysis showed that the 2013 valuation assumption underestimated the number of withdrawals for Old and New Benefits members, so the assumption has been changed to reflect the experience more closely. This leads to an increased allowance for withdrawals, which increases the liabilities slightly, as more members are assumed to receive deferred pension revaluation rather than pensionable salary growth that is limited to 1.0% pa. Experience for Career Average Benefits 2006 and 2011 members was broadly in line with expectations so the 2013 valuation assumption has been retained. 8

11 Early retirements The experience analysis showed that the number of active members retiring early was broadly in line with expectations at ages 55 and above. For the purposes of the 2016 valuation, we have adopted the same assumptions as for the 2013 valuation. To summarise, we have: assumed that deferred pensioners will draw their benefits at their Normal Retirement Age (60 or 65); as the voluntary early retirement terms are cost neutral, the finances of the Scheme will be largely unaffected if members retire early; retained the 2013 assumptions for the proportions of Old and New Benefits active members retiring early on voluntary grounds, namely that 10% of members will retire at each age from 55 to 59. The number of ill-health retirements in the last three years was relatively small and lower than the number assumed. Given that this assumption is not financially significant, we have retained the 2013 assumption for the number of members retiring early on ill-health grounds. Financial dependants At previous valuations there has been insufficient data available to analyse the number of Scheme members who are likely to have a dependant to whom a pension may be payable on the death of the member. For the 2016 valuation we have been provided with new data relating to the current pensioner population and analysis of this showed that the proportion of members with financial dependants was around 85% of men and 70% of women at age 60 so we have adopted this assumption for the 2016 valuation. This includes an allowance for pensions to be paid to discretionary dependants. Overall this change reduces the liability value slightly. Dependants are assumed to be of the opposite sex to the member, with the age difference (male female) being three years. Allowance for commutation When members retire, they can choose to exchange (or commute ) part of their pension for a tax-free cash lump sum. The terms of exchange differ according to whether the member joined the Scheme before or after 1 April However, in either case, the value of each 1 pa of pension on the basis used for the technical provisions is greater than the value of the cash lump sum, and so reserves have been released from year to year as members have commuted pension. For the calculations as at 1 April 2016, it has been assumed that 40% of members commute some Scheme pension, of whom pre 1 April 1992 joiners (with the 10:1 rate) commute around 25% of their pension and post 1 April 1992 joiners (with the 12:1 rate) commute around 30%. This is the same assumption as for the 2013 valuation. New entrants As the Scheme is closed to new entrants, we have assumed that no new members will join. 9

12 Introduction Statutory funding objective The Trustee s primary formal funding objective is the statutory funding objective under the Pensions Act 2004, which is to have sufficient and appropriate assets to cover the Scheme s technical provisions. The technical provisions are calculated by projecting the benefits (which are mostly pension payments) expected to be paid in each year after the valuation date and then discounting the resulting cashflows to obtain a present value. Benefits accrued in respect of service only up to the valuation date are taken into account in this calculation (although an allowance is made for an assumed level of future pensionable earnings increases for employed members). The main benefits taken into account in this actuarial valuation are summarised in the section of this report. The projections allow for benefit payments being made from the Scheme over the next 80 or so years. Most of these payments depend on future increases in price inflation statistics subject to specified limits The method and assumptions for calculating the technical provisions as at 1 April 2016 have been agreed between the Trustee and BBC and are documented in the Statement of Principles dated 14 June 2017, and summarised in the section of this report. The table below compares the Scheme s technical provisions as at the date of the actuarial valuation (1 April 2016) with the market value of the Scheme s assets and the corresponding figures from the previous actuarial valuation: Valuation statement 1 April April 2013 m m Amount required to provide for the Scheme s liabilities in respect of: Employed members 1,918 1,455 Deferred pensioners 5,315 3,565 Pensioners and dependants 7,257 7,135 Expenses AVCs Technical provisions 14,680 12,346 Market value of assets 12,911 10,292 Past service deficit (technical provisions less assets) 1,769 2,054 level (assets technical provisions) 87.9% 83.4% Developments since the previous valuation There have been no significant changes in the Scheme benefits since the previous valuation. In 2016, Pension Increase Exchange and Retirement Transfer Option exercises were carried out. The chart below shows the impact of these exercises on the funding position. 10

13 The funding level has increased to 87.9% (deficit of 1,769 million) from 83.4% (deficit of 2,054 million) at the previous valuation. The main factors contributing to this improvement are shown below Deficit ( m) Interest on deficit 2, Reduction in deficit Increase in deficit Contributions experience 359 Investment returns greater than assumed in technical provisions calculations 2,163 Increases different to assumed 47 Miscellaneous demographic experience 170 Impact of PIE and RTO 70 Change in financial assumptions 2,453 Change in mortality assumption 442 Change in other demographic assumptions Deficit ( m) 1,769 Contribution requirements -3,000-2,000-1, ,000 2,000 3,000 m Future accrual of benefits Under the method and assumptions described in the Statement of Principles dated 14 June 2017, the overall contribution rate needed to provide the benefits that are expected to be accrued between 1 April 2016 and 1 April 2019 is 37.6% of Pensionable Salaries. This rate is inclusive of members mandatory contributions which are payable via salary sacrifice. Members Added Years and AVC contributions are payable in addition to the rate shown. An allowance is included in this future service contribution rate for the BBC s share of the cost of Added Years and the matching contributions under the AVC Plus arrangement, where applicable. No allowance is included for administration expenses other tha n the cost of insuring the lump sums payable on death in service. PPF Levies are paid to the Scheme in full by the BBC following receipt of the relevant invoices from the PPF Board. The Trustee and the BBC have agreed that the BBC will pay future service contributions of 37.6% of Pensionable Earnings less members mandatory contributions from 1 April The average member contribution rate as at the valuation date is 6.2% of Pensionable Salaries and therefore the BBC s contribution rate will be 31.4% of Pensionable Salaries. Until then, BBC contributions will continue at the current rate of 16.7% of Pensionable Salaries. 11

14 The change in the joint contribution rate and the main factors contributing to the change are shown below joint contribution rate 23.0% Reduction in contribution rate Change in membership profile 0.8% Increase in contribution rate Change in financial assumptions 15.6% Change in demographic assumptions 2016 joint contribution rate 1.8% 37.6% As the Scheme is closed to new entrants, the average age of its active membership is expected to rise in future. When this happens the contribution rate required to cover accruing benefits is very likely to rise as there will then be a shorter period over which investment returns can be earned on the contributions. Offsetting this, the balance of active members by section will change so the proportion of Old Benefits members in particular (whose benefits are the most expensive to provide) will reduce over time, resulting in a reduction in the average contribution rate. On balance, we expect that these two effects will broadly cancel out so the average contribution rate is likely to remain relatively stable for several years to come. By contrast, the cash amount required to meet this cost may eventually fall because the number of members to whom the rate applies will fall as active members leave service, retire or die. Recovery plan 0% 10% 20% 30% 40% 50% % of Pensionable Earnings As there were insufficient assets to cover the Scheme s technical provisions at the valuation date, the Trustee and the BBC are required to agree a recovery plan. This specifies how, and by when, the statutory funding objective is expected to be met. The Trustee and the BBC have agreed a recovery plan with fixed total contribution amounts which cover both the BBC s normal contributions in respect of future service and amounts to remove the deficit as at 1 April The total amounts payable in each Scheme year, and the estimated split between the two elements are as shown below: Contribution ( m) Future service (estimated, m) Deficit payment (estimated, m) Year to Total payments ( m) 1 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Dec

15 The detailed payment terms are set out in the Recovery Plan dated 14 June The balance of the funding shortfall is expected to be met by investment returns on the Scheme s assets that are assumed to be greater than the prudent assumptions underlying the calculation of the Scheme s technical provisions. The assumption made for this purpose is that the investment returns will exceed the technical provisions discount rate in each future year in line with the following table: Period Outperformance over discount rate (% pa) 1 April December January March April December January 2029 onwards 0.1* (*but not expected to be needed as projected to be fully funded at 31 December 2028) When this outperformance is combined with the margin over gilts in the discount rate, the intention is that the total assumed investment returns will be less than the expected returns from the asset portfolios from time to time, so that the recovery plan is based on prudent principles. If the assumptions documented in the Statement of Principles are borne out in practice, the deficit will be removed by 31 December In practice full funding on the technical provisions basis may occur sooner or later than 2028 depending on factors such as the actual returns achieved by the Scheme s investments and future movements in gilt yields. In accordance with Part 3 of the Pensions Act 2004 and Rule 3.4, the Actuary must certify that the contributions to be paid are not lower than those which the Actuary would have provided for if he or she, rather than the Trustee with the agreement of the BBC, had the responsibility for setting them. My statement to this effect is included in my certificate to the Schedule of Contributions dated 14 June Secondary funding objective As part of the 2016 valuation, the Trustee and BBC have agreed a secondary funding objective in addition to the statutory funding objective. This is that the Scheme should aim to have sufficient and appropriate assets to cover its secondary funding target by 31 December The secondary funding target is a stronger target than the statutory funding objective, and one to which the Trustee aspires over the longer term. Once 100% funding on the technical provisions basis is reached, the secondary funding target may be expected to be achieved by a combination of investment returns and contributions. The Trustee s secondary funding objective is for the Scheme to be fully funded on a measure of selfsufficiency, known by the Scheme as the Journey Plan. If the Scheme were to reach full funding on the Journey Plan self-sufficiency measure, it could remove the majority of investment risks and meet benefit payments as they fall due, with a very low probability of requiring additional contributions from the BBC. The discount rate used will equate to the rate of return that could be generated by holding low risk assets that match the Scheme s liabilities. The method and assumptions for calculating the liabilities on the self-sufficiency basis as at 1 April 2016 have been agreed between the Trustee and BBC and are documented in the Statement of Principles dated 14 June They are the same as those adopted for the technical provisions, with the exception that: the discount rate margin in excess of gilt yields is 0.5% pa at all terms. The single equivalent average discount rate adopted as at 1 April 2016 for the self-sufficiency basis, weighted by the liability cashflows at the valuation date, is 2.7% pa. 13

16 no inflation risk premium is used, so the price inflation assumption is 0.1% pa higher at all terms (with pension increase and revaluation assumptions being correspondingly higher). The table below compares the Scheme s self-sufficiency liability value as at the date of the actuarial valuation (1 April 2016) with the market value of the Scheme s assets and the corresponding figures from the previous actuarial valuation: Valuation statement 1 April April 2013 m m Amount required to provide for the Scheme s liabilities in respect of: Employed members 2,197 2,005 Deferred pensioners 6,141 5,307 Pensioners and dependants 8,029 7,440 Expenses AVCs Total value of liabilities on self-sufficiency basis 16,557 14,943 Market value of assets 12,911 10,292 Past service deficit (self-sufficiency liability value less assets) 3,646 4,651 level (assets self-sufficiency liability value) 78.0% 68.9% Taking into account the recovery plan agreed for the purpose of achieving the statutory funding objective, the shortfall on the self-sufficiency basis is expected to be eliminated by 31 December This projection is based on a number of assumptions about investment markets that represent the Trustee s best estimate of the likely outcome. In practice full funding on the self-sufficiency basis may occur sooner or later than 2028 depending on factors such as the actual returns achieved by the Scheme s investments and future movements in gilt yields. Cash equivalent transfers In accordance with the Statement of Principles, I am required to investigate whether the Scheme s assets are sufficient to provide cash equivalent transfers, on the method and assumptions currently used, for all active and deferred pensioners, without prejudicing the benefits of pensioners and other prospective beneficiaries (also measured on a cash equivalent basis). I confirm that, as at 1 April 2016, the Scheme s assets were sufficient for this purpose. Projections and sensitivities Based on the assumptions underlying the calculation of the Scheme s technical provisions as at 1 April 2016, allowing for contributions to be paid to the Scheme as described above and assuming that investment returns exceed the discount rate in line with the table in the recovery plan section above, the funding level is projected to increase from 87.9% to 90% by the expected date of the next actuarial valuation (1 April 2019) % % 14

17 The charts below illustrate the sensitivity of the technical provisions, the joint future service contribution rate and the self-sufficiency liability value as at 1 April 2016 to variations of individual key assumptions. (If more than one of these assumptions is varied, the effect may be greater than the sum of the changes from varying individual assumptions.) level 80% 75% 70% 78.0% 70.1% 77.3% level 90% 85% 80% 75% 87.9% 79.5% 87.2% 65% Self-sufficiency Discount rate 0.5% pa lower Long-term longevity improvements 0.25% pa higher 70% Technical provisions Discount rate 0.5% pa lower Long-term longevity improvements 0.25% pa higher Joint contribution rate 44% 42% 40% 38% 36% 34% 37.6% Future service rate 43.6% Discount rate 0.5% pa lower 38.1% Long-term longevity improvements 0.25% pa higher The impact on assumed life expectancies (for both men and women) of increasing the long-term longevity improvements by 0.25% pa is to increase the life expectancy for a current 60 year old by around 0.2 years, and for a 60 year old in 20 years time by around 0.5 years. 15

18 Introduction Discontinuance In the event that the Scheme is discontinued, the benefits of employed members would crystallise and become deferred pensions in the Scheme. There would be no entitlement to further accrual of benefits. If the Scheme s discontinuance is not the result of the BBC s insolvency, the BBC would ultimately be required to pay to the Scheme any deficit between the Scheme Actuary s estimate of the full cost of securing Scheme benefits with an insurance company (including expenses) and the value of the Scheme s assets the employer debt. The Trustee would then normally try to buy insurance policies to secure future benefit payments. However, the Trustee may decide to run the Scheme as a closed fund for a period of years before buying such policies if it is confident that doing so is likely to produce higher benefits for members or if there are practical difficulties with buying insurance policies, such as a lack of market capacity. If the Scheme s discontinuance is a result of the BBC s insolvency, the employer debt would be determined as above and the Scheme would also be assessed for possible entry to the Pension Protection Fund ( PPF ). If the assessment concluded that the assets (including any funds recovered from the BBC) were not sufficient to secure benefits equal to the PPF compensation then the Scheme would be admitted to and members compensated by the PPF. Otherwise the Scheme would be required to secure a higher level of benefits with an insurance company; the level of benefits that members would actually receive would depend upon the terms available in the market at that time and could be more or less than the PPF level of compensation. Statutory estimate of solvency The Pensions Act 2004 requires that I provide the Trustee with an estimate of the solvency of the Scheme at the valuation date. Normally, this means an estimate of the proportion of the accrued benefits that could have been secured by buying insurance policies with the assets held by the Scheme at the valuation date. For this purpose I have assumed that no further payments are received from the BBC. I have assumed that the insurance company price would be calculated on an actuarial basis similar to that implied by bulk annuity quotations seen by Willis Towers Watson at around the valuation date. I have assumed the cost of implementing the winding-up to be calculated in line with the PPF S179 (levy valuation) methodology (leading to assumed winding-up costs of 263 million). The table below summarises the main assumptions used to estimate the Scheme s solvency position at this and the previous actuarial valuation; other assumptions are as used to calculate the technical provisions liabilities. As for the technical provisions basis, the financial assumptions for the 2016 solvency estimate use term-dependent discount rate and increase curves; the rates shown in the table are single equivalents to the full term-dependent curve, weighted by the relevant liability cashflows at the valuation date. The retail price inflation assumption is the same as that used for the self-sufficiency basis, ie without an inflation risk premium. The financial assumptions for the 2013 solvency estimate used single rates for all assumptions. Financial assumptions 1 April April 2013 % pa % pa Pensioner discount rate Non-pensioner discount rate Retail price inflation CAB 2006 and CAB 2011 revaluation Nil Nil Gap between RPI and CPI 0.5 Nil Demographic assumptions 1 April April 2013 Model for future improvements in longevity CMI 2015 CMI 2012 Long term rate for future improvements in longevity 1.5% pa 1.5% pa Proportion of pension exchanged for a lump sum at retirement 0% 0% 16

19 My estimate of the solvency position of the Scheme as at 1 April 2016 is that the assets of the Scheme would have met 62.1% of the cost of buying insurance policies to secure the benefits at that date, based on the assumptions described above. Further details are set out in the table below alongside the corresponding details as at the previous valuation date: Valuation statement 1 April April 2013 m m Total estimated cost* 20,789 19,368 Market value of assets* 12,911 10,292 deficit (total estimated cost less assets) 7,878 9,076 level (assets total estimated cost) 62.1% 53.1% * including AVCs The change in the solvency level from 53.1% to 62.1% is due mainly to the investment performance of the Scheme s assets being better than assumed on this basis. The solvency estimate should not be relied upon to indicate the position on a future winding-up. Changes in market interest rates and in the supply and demand for annuities mean that the actual position at any particular point in time can be established only by obtaining specific quotations for buying the insurance policies required to secure the benefits. The coverage for particular benefits depends on where they fall in the statutory priority order below. However, money purchase liabilities, such as those arising from members Additional Voluntary Contributions (AVCs), are excluded from the statutory priority order; their treatment is determined by the Scheme's own rules and would normally be that they are secured in full before any other benefits. category 1 benefits relating to certain pension annuities secured by the Scheme before 6 April 1997 (of which I understand there are none for the Scheme); category 2 the cost to the Scheme of securing the compensation that would otherwise be payable by the PPF if the BBC became insolvent; category 3 benefits in respect of defined benefit AVCs not dealt with above; category 4 all other pensions and benefits due under the Scheme, including pension increases (where these exceed those under the PPF). The Section 179 valuation as at 31 March 2016 resulted in a PPF funding level of 91.8%. As the Scheme assets did not cover the Section 179 liabilities as at 1 April 2016, the Scheme would probably have qualified for entry to the PPF had the BBC become insolvent at 1 April 2016, in which case the members would have received PPF compensation in place of their benefits. Relationship between the cost of securing benefits and the technical provisions My estimate of the cost of securing benefits with an insurance company of 20,789 million is 6,109 million higher than the Scheme s technical provisions of 14,680 million. The technical provisions are intended to be a prudent assessment of the assets required under the Scheme s investment strategy to meet future benefit payments as and when they fall due but with reliance placed on the BBC being able to support the Scheme in future if the assumptions are not borne out in practice. By contrast the estimated cost of securing benefits with an insurance company is based on the price that an insurer might be likely to charge to take on the risks associated with operating the Scheme without having recourse to future contributions from the BBC. If the statutory funding objective had been exactly met on 1 April 2016 (ie there had been no funding surplus or deficit), I estimate that the solvency level of the Scheme would have been 70.6%. This compares with 63.7% at the 1 April 2013 actuarial valuation. This improvement is due to the estimated cost of buying 17

20 annuities with an insurer having increased by less than the expected cost of providing the benefits within the Scheme. Projections and sensitivities Based on the assumptions underlying the calculation of the Scheme s technical provision as at 1 April 2016, assuming that investment returns are in line with those assumed under the recovery plan and allowing for contributions to be paid to the Scheme as summarised in the section of this report, the solvency level is projected to increase from 62.1% to 65% by the expected date of the next actuarial valuation % 65% The table below illustrates the sensitivity of the solvency position as at 1 April 2016 to variations of individual key assumptions. (If more than one of these assumptions is varied, the effect may be greater than the sum of the changes from varying individual assumptions.) level 65% 60% 55% 62.1% 55.1% 61.5% 50% Discount rate 0.5% pa lower Long-term longevity improvements 0.25% pa higher 18

21 Introduction Risks The table below summarises the main risks to the financial position of the Scheme and the actions taken to manage them: Risk BBC unable to pay contributions or make good deficits in the future Investment returns on the existing assets could be insufficient to meet the Trustee s funding objectives Investment returns on future income could be lower than the returns available at the valuation date Price inflation could be different from that assumed which could result in higher liabilities Falls in asset values might not be matched by similar falls in the value of the Scheme s liabilities Scheme members live longer than assumed Options exercised by members could lead to increases in the Scheme s liabilities Legislative changes could lead to increases in the Scheme s liabilities Approach taken to risk At each valuation the Trustee takes advice from an independent specialist on the ability of the BBC to pay contributions to the Scheme and, in particular, to make good any shortfall that may arise if the experience of the Scheme is adverse. This advice is taken into account when determining the level of technical provisions and in considering the appropriateness of any recovery plan to remove a deficit relative to the technical provisions. Between valuations the Trustee monitors the BBC s financial strength regularly. The Trustee takes advice from the Scheme Actuary on possible assumptions for future investment returns. For the calculation of the Scheme s technical provisions, the Trustee has adopted discount rates that are lower than the expected returns on the Scheme assets. The Trustee is able to agree further contributions with the BBC at subsequent valuations if future returns prove insufficient. The Trustee takes this risk into account when determining the Scheme s technical provisions, by incorporating a level of prudence into the investment return assumptions. The Scheme currently hedges part of its exposure to changes in interest rates. The Trustee invests in assets that are expected to be correlated to future inflation in the longer term (sometimes referred to as real assets). This means that, over the longer term, such assets are expected to keep pace with inflation. Such assets include equities, property and index-linked bonds. The Scheme currently hedges part of its exposure to inflation risk. The Trustee considers this risk when determining the Scheme s investment strategy. It consults with the BBC in order to understand the BBC s appetite for bearing this risk and takes advice on the BBC s ability to make good any shortfall that may arise. To the extent that such falls in asset values result in deficits at future valuations, the BBC would be required to agree a recovery plan with the Trustee to restore full funding over a period of time. For the calculation of the technical provisions, the Trustee has adopted mortality assumptions that it regards as prudent estimates of the life expectancy of members so that higher reserves are targeted in respect of the risk than are expected to be necessary. At each valuation, the Scheme s experience is analysed and advice is taken on wider developments in longevity that could be relevant for the Scheme. The Trustee sets the terms for converting benefits in respect of member options on the basis of actuarial advice with the view to avoiding strains on the Scheme s finances as far as is reasonably possible without disadvantaging members. The terms are kept under regular review, generally following each actuarial valuation. The Trustee takes legal and actuarial advice on changes in legislation and consults with the BBC, where relevant. Economic risk Demographic risk Legal risk 19