The Cheviot Pension Actuarial valuation as at 31 December 2017 June 2018
. The Cheviot Pension actuarial valuation as at 31 December 2017
Valuation highlights I have carried out an actuarial valuation of the With Profits Section of the Cheviot Pension of the Cheviot Trust (the Section ) as at 31 December 2017. The key findings of the valuation are: The scheme funding valuation showed a surplus of 2.2m with the value of assets covering 102% of the value of the liabilities. No contributions are currently necessary from the With Profits Employers. The scheme funding valuation is carried out on assumptions set out in the Trustee s statement of funding principles. It assumes that the Section operates until the last pensioner dies and the last non-pensioner retires. No recovery plan is required as the Section was in surplus on the scheme funding assumptions at the valuation date. The solvency valuation showed a deficit of 9.9m. The solvency valuation is an assessment of the estimated financial position of the Section had it wound up at the effective date of the valuation. The assumptions, taken together, aim to estimate the cost of securing the liabilities with an insurance company. No bonuses are recommended in respect of 2017 other than the final bonus on contributions paid before 1 July 1988. This final bonus should remain at 54%. The question as to whether the Section is able to meet all of its obligations in full will depend on future events rather than the assumptions made. Actual experience will be different from many of the assumptions made, so there is no guarantee that the benefits will be paid in full.. Jonathan Punter Fellow of the Institute and Faculty of Actuaries Scheme Actuary Punter Southall Limited 11 Strand, London, WC2N 5HR June 2018
Contents 1. Introduction 1 2. Scheme funding valuation 2 3. Solvency and FRS102 valuations 4 4. Bonus recommendations 5 5. Sensitivity and risks 6 6. Conclusion 7 Appendices 8 Appendix A: Section benefits and data 9 Appendix B: Assumptions 11 Appendix C: Scheme funding documents 12 Appendix D: Legal and compliance notices 18
1. Introduction I have carried out an actuarial valuation of the Cheviot Pension of the Cheviot Trust (the Scheme ) as at 31 December 2017, as required under Clause 23.2 of the Scheme s trust deed dated 4 April 2017, as amended (the Trust Deed ), including a scheme funding valuation as required under the scheme funding framework introduced by section 224 of the Pensions Act 2004. I carried out the previous actuarial valuation as at 31 December 2014 (the 2014 valuation ). I have already provided Cheviot Trustees Limited (the Trustee ) with all of my advice in relation to the valuation, including the results, in a number of previous reports, letters and presentations. The purpose of this report is to set out in one place the final results of the valuation and to satisfy the legislative requirement for reporting and certifying the results of the valuation, within 15 months of its effective date. The Scheme comprises the With Profits Section, Money Purchase Section and Life Cover Section. Liabilities in the Money Purchase Section are linked to the assets held, and so have been excluded from all asset and liability figures illustrated in this report. The Life Cover Section provides only insured death in service benefits and has also been excluded from this report. The valuation includes: Scheme funding valuation: An assessment of the position of the Section relative to its statutory funding objective. Solvency valuation: An assessment of the adequacy of the Section s assets to meet the benefits payable in the event of winding up. FRS102 valuation: An assessment of the Section s funding position for company accounting purposes. Bonus advice: An assessment of the funding position of the Section on a range of measures to establish whether any bonuses should be declared on the with profits benefits. Regulations require the Trustee to make this report available to those employers who were contributing to the Section when it closed on 31 December 2002 (the Statutory Employers ) within 7 days of receiving it. A summary of the actuarial valuation will need to be submitted to the Pensions Regulator (the regulator ) in due course. The With Profits Section (the Section ) closed to new contributions at the end of December 2002. The Section s benefits were reclassified as cash balance following section 29 of the Pensions Act 2011 coming into force on 24 July 2014, and the Section became subject to the scheme specific funding requirements. The With Profits Employers, to whom the responsibility for funding the Section falls, are defined in Schedule 1 of the Trust Deed and Rules dated 4 April 2017. 1
2. Scheme funding valuation 2.1 Funding objective Scheme funding legislation sets out a statutory funding objective which is that a scheme must have sufficient and appropriate assets to cover the estimated cost of providing benefits on a scheme funding basis 1. The Trustee has adopted this as their funding objective for the Section, as they did for the 2014 valuation. 2.2 Method and assumptions In carrying out the valuation of the Section, I have had to make a number of assumptions. For the scheme funding valuation, the Trustee is required to agree the method and assumptions used to determine the scheme funding liabilities of the Section following consultation 2 with the With Profits Employers. These are set out in the statement of funding principles dated 20 June 2018, which is included in Appendix C. In determining the scheme funding valuation assumptions the Trustee took into account the strength of the With Profits Employers covenant (the ability of the With Profits Employers to fund the Section), the Section s investment strategy, market conditions at the valuation date and the Section s membership profile. In particular, the Trustee based the valuation on their view that the With Profits Employers covenant was strong at the valuation date, based on an independent covenant assessment. Further details of the assumptions used are included in Appendix B. 2.3 Results 1 The estimated cost of providing benefits for scheme funding purposes is known as the technical provisions. 2 As set out in Clause 6.3.4 of the Trust Deed. A comparison of the present value of the Section s liabilities and its assets at 31 December 2017 is as follows: Estimated cost of providing benefits for: pensioners 31.2 non-pensioners 71.8 expenses 6.0 Total estimated cost of providing benefits (A) 109.0 Total value of assets (B) 111.2 Surplus/(deficit) (B-A) 2.2 Funding level (B/A) 102% The results shown above do not reflect the position if the Section were to wind up and buy out benefits with an insurance company, or the funding position the With Profits Employers should account for in their financial reporting. These are covered in section 3. My certificate of the calculation of the scheme funding liabilities is included in Appendix C. 2.4 Experience analysis since the 2014 valuation The 2014 valuation showed a surplus of 0.2m, indicating an overall gain of 2.0m over the inter-valuation experience. This is analysed below: Surplus on 2014 valuation 0.2 Asset performance better than assumed (excluding hedge) 6.4 Expenses experience (versus notional release from expense reserve) (3.2) Mortality experience 0.1 Change in discount rate (short term rate reduced by 0.2% per year, long term rate reduced by 0.1% per year) Change in mortality base table (from S1PA tables to 106%/99% S2PA) 0.3 Change in mortality improvement model (from CMI_2014 to CMI_2016) 1.0 m m (1.2) Change in expense reserve (from PPF model to 1.3m a year to 2022) (1.7) Miscellaneous 0.3 Surplus on 2017 valuation 2.2 2
2.5 Events since the valuation The Trustee continues to monitor the Section s funding position quarterly. As at 31 March 2018, the scheme funding level had fallen to around 100%. As part of the new dynamic funding approach, discussed further in section 5.2 below, the Trustee s investment advisor has updated their recommendation for asset outperformance, based on market conditions at 31 March 2018, increasing the short term discount rate by 0.1% per year. This has been incorporated in the funding level at 31 March reported above. 2.6 Agreed contribution plan There were no active members of the Section as at the valuation date and so no contributions are required for future service benefit accrual. Furthermore, as the statutory funding objective was met on the valuation date, the Trustee does not need to prepare a recovery plan. The expenses of running the Section are met from the Section s assets. As such, no contributions are currently required from the With Profits Employers to the Section. This position is confirmed in the Schedule of Contributions, a copy of which can be found in Appendix C. 2.7 Projected funding level at the next actuarial valuation Based on the assumptions set out in the statement of funding principles, in particular future investment returns, I expect that over the three year period following the valuation date the Section s funding position will be stable on the scheme funding basis. In practice the Section is exposed to a number of risks as set out in section 5 below, which mean that the funding level at the next valuation date is subject to considerable uncertainty. 3
3. Solvency and FRS102 valuations 3.1 Solvency valuation The solvency valuation is an assessment of the adequacy of the Section s assets to secure the benefits with an insurance company in the event of winding up and assumes that the Section ceases on the valuation date. This differs from the scheme funding valuation, which assumes that the Section operates as a going concern. My solvency estimate is based on data pricing points made available to us by insurers. Actual terms for buying out the liabilities will not be known without negotiating terms with the providers. Therefore my solvency estimate should be considered approximate only. If the Section were to wind-up in the future the actual cost would depend on investment market conditions and the terms available from insurance companies at the date of securing benefits. Further details of the assumptions used are included in Appendix B. 3.2 FRS102 valuation The purpose of the FRS102 valuation is to provide illustrative results for the With Profits Employers to use in their company accounts. Financial Reporting Standard 102, issued by the Financial Reporting Council, requires the assumptions to lead to a best estimate of a scheme s liabilities. Best estimate is not uniquely defined and so there are a range of acceptable assumptions that comply with FRS102. Under FRS102 the responsibility for setting the assumptions used in a company s accounts lie with the company directors. To assist the With Profits Employers with their accounting requirements, it is the Trustee s policy to track liabilities on a central set of assumptions that comply with FRS102. I have used the Trustee s central basis to calculate this FRS102 valuation. Further details of the assumptions used are included in Appendix B. On this basis, the Section had liabilities of 105.5m and was 105% funded at the valuation date, equivalent to a surplus of 5.7m. On this basis, the Section had liabilities of 121.1m and was 92% funded at the valuation date, equivalent to a deficit of 9.9m. This is my statutory estimate of the solvency of the Section as required under section 7 of the Occupational Pension Scheme (Scheme Funding) Regulations 2005. The solvency valuation carried out at the 2014 valuation showed liabilities of 144.6m and a deficit of 25.3m. Since the last valuation the solvency deficit has therefore decreased by 15.4m. The main reasons for this improvement are: - the assumptions used to place a value on the liabilities have weakened versus those used in the 2014 valuation. This reflects more competitive pricing currently offered by the insurance market; and - investment returns have been higher than expected. I expect the overall solvency funding level to improve further over the three year period following the valuation date if the scheme funding assumptions are borne out in practice. 4
4. Bonus recommendations One of the purposes of this valuation is to provide information and recommendations to the Trustee on the level of bonuses to grant on the with profit benefits. More details on the various types of bonus which are considered is given in section 1.1 of Appendix A. The recommendations which were based on the results of this valuation, and were made and accepted at the March 2018 Trustee meeting, are documented below. 4.1 Recommendations (agreed at March 2018 Trustee meeting) Pensioner members: 1. No bonus should be awarded in respect of 2017. Non-pensioner members: 2. No annual bonus should be awarded in respect of 2017. 3. No interim annual bonus should be awarded in respect of 2018. 4. No base bonus on any annual bonuses awarded since 1 January 2000 should be awarded in respect of 2017. 5. The final bonus on contributions paid pre-1988 should remain at 54%. 6. No other final bonus should be awarded. 7. Interest for members over normal retirement age where this is at the Trustee s discretion and on delayed payments of benefits should be increased from 0.25% per annum to 0.5% per annum with effect from 1 April 2018. The bonuses set out in 1 to 4 and 6 above should continue to be reviewed on an annual basis and should next be reviewed following the 31 December 2018 interim valuation. The final bonus under 5 should be monitored on a monthly basis with a formal review if the agreed trigger moves outside the tolerance range. The interest rate under 7 should be reviewed biannually. 5
5. Sensitivity and risks 5.1 Sensitivity to changes in assumptions When agreeing the statement of funding principles in Appendix C, the Trustee has considered my advice on the sensitivity of the funding of the Section to changes in the key assumptions. The funding position of the Section is particularly sensitive to: the assumed discount rate; the assumed longevity of members in retirement; and the reserve made for future expenses. The following table shows the approximate effect of changing some of the key assumptions in isolation. The changes are given relative to the scheme funding results in section 2, i.e. a surplus of 2.2m. Assumption Change Impact on surplus Discount rate: short-term returns +0.1% pa + 0.4m Discount rate: long-term returns +0.1% pa + 0.4m Discount rate: de-risking term +1 year + 1.0m Mortality: improvement model CMI_2016 to CMI_2017 + 0.3m Mortality: smoothing parameter 7.5 to 8.5-0.9m Expense reserve Add cost of securing remaining liabilities with insurer in 2022-2.6m For example, from the table, if the short term discount rate was increased by 0.1% per annum from swaps + 2.2% per annum to swaps + 2.3% per annum, the scheme funding surplus would increase to 2.6m (from 2.2m). 5.2 Sensitivity to investment market changes The investment strategy adopted by the Trustee is set out in the statement of investment principles dated 14 June 2018. The overall objective is to achieve an investment return of 2.4% above the yield available on swaps. The Section s assets are split between a matching fund and an investment fund targeting higher returns. The matching fund includes an interest rate and inflation hedge which cover 100% of the Section s exposure to these risks. This means that the Section s funding level is resilient to changes in real and nominal interest rates. In addition, the Trustee has put in place an equity derivative overlay strategy which protects the Section against downside movements in global equity prices. As part of this valuation, the Trustee has moved to a dynamic funding discount rate which allows for the Section s strategic asset allocation and investment return expectations above swaps at any given valuation date to derive a discount rate assumption which reflects market conditions at that time. This should lead to a more stable funding level as markets move over time, as illustrated in section 2.5 above. 5.3 Risk management Whether or not the Section is able to meet all of its obligations in full will depend upon future events rather than the assumptions made. Actual experience will be different from many of the assumptions made, so there is no guarantee that the benefits will always be paid in full. In particular, the key risks are that the assets do not deliver the targeted returns, that members live longer than expected, or that expenses are higher than expected. The Trustee monitors and manages these risks. In particular, the Trustee regularly monitors the With Profits Employers covenant, the investment performance and funding position, with specific triggers set for taking mitigating action as necessary. This might include reviewing the investment strategy, and reviewing the funding plan. 6
6. Conclusion 6.1 Main findings of the valuation This actuarial valuation shows that the Section was 102% funded on the scheme funding basis at 31 December 2017. The assets were therefore 2.2m higher than the scheme funding liabilities at the valuation date. The position on the buy-out basis was 92%, and on the central FRS102 basis it was 105%. Over the period since the 2014 valuation, the funding level has improved. The main reason for this was higher than expected investment returns on the Section s assets. On the basis of these results I have recommended that no bonuses be awarded to with profit benefits, other than a 54% final bonus on pre-1988 funds. As the valuation revealed a scheme funding surplus, no contributions are required from the With Profits Employers at this stage. 6.2 Next steps The Trustee has asked me to provide interim annual actuarial reports on the funding position of the Section, with the next actuarial valuation being due as at 31 December 2020. The Trustee also intends to monitor the funding position of the Section quarterly, and after consulting the With Profits Employers, may obtain a full valuation if they believe that events make this appropriate. 7
Appendices 8
Appendix A: 1. Scheme benefits 1.1 With Profits Section Section benefits and data The Section s benefits that have been valued in the actuarial valuation are described in the Scheme s definitive trust deed and rules dated 4 April 2017 and subsequent amending deeds and announcements. Contributions made to the Section receive the following guaranteed rates of interest: Contributions paid and annual bonuses awarded before 1 January 1997 Contributions paid and annual bonuses awarded between 1 January 1997 and 31 December 1999 Contributions paid between 1 January 2000 and 31 December 2002 Annual bonuses awarded since 1 January 2000 Guaranteed interest 5% per annum 3.5% per annum 3% per annum Nil (receive base bonus) In addition, at the Trustee s discretion, the following bonuses may be granted: Description Level Base bonus Payable on annual bonuses awarded since 1 Nil since 2005 January 2000 Annual bonus Awarded on 1 July in respect of previous year s Nil since 2001 investment return Interim annual bonus Payable to members who take benefits from the Section prior to the addition of any annual bonus Nil since 2001 Final bonus Payable when members take their benefits. It is not guaranteed and may change over time 54% on pre-88 Otherwise nil since mid-2002 The Section has been closed to new entrants and to contributions since 31 December 2002. Current pensioners may receive the following increases in payment: Flat (non-increases, non-profit) With profit only With profit LPI LPI only Available for retirements Pre 1 January 1997 Post 31 December 1996 Guaranteed increases Nil Minimum increase in line with CPI inflation up to 5% On retirement, a member s account is used to secure a pension and/or pay a tax-free lump sum. Members can also transfer into a drawdown arrangement. Up to 30 June 2005, members had the option to convert account balances into pensions within the Section. However, this was withdrawn with effect from 1 July 2005; members must now transfer their account to an insurance company or other pension arrangement on retirement. The Section appears to comply with the main equal treatment requirements of the European Court, as far these are known, and the actuarial valuation has been prepared on this basis. I have assumed that these requirements have been validly incorporated into the trust deed and rules. There has been no recent history of discretionary increases or discretionary benefits being awarded under the Section. In line with this past practice, I have therefore made no allowance for discretionary increases or benefits being granted in future. 1.2 Money Purchase Section Contributions to the Money Purchase Section are invested in Cautious, Moderate, Growth, Low Cost, Retirement Planning, Pension Protection and Cash funds. The value of funds moves in line with the value of the underlying investments. Funds in respect of the Money Purchase Section have been excluded from the assets and liabilities for the purpose of this valuation. The Money Purchase Section is open to new entrants. 1.3 Life Cover Section The Life Cover Section provides fully insured death in service benefits only. It has been excluded from this valuation. 9
1.4 Scheme and legislative developments since the 2014 valuation A number of amending deeds have been implemented since the 2014 valuation. Any changes that are material to the valuation are covered above. In addition, a significant number of legislative developments have occurred or have been proposed since the 2014 valuation. These developments have been brought to the Trustee s attention where appropriate and are covered in this report where they are relevant to the valuation. 2. Membership data My valuation relies upon the accuracy of the information provided by the Trustee. The membership data was supplied by the Cheviot Trust. A summary of the data provided is given below. I have carried out a number of reasonableness checks on the data supplied and confirm that I am satisfied that the data is of adequate quality for the purpose of this valuation. 2.1 Active members (still paying contributions under the MP Section) 31 December 2014 31 December 2017 Number 396 258 Account balances* ( 000s) 14,176 10,206 * Account balances include accrued bonuses and interest. Money purchase funds are excluded. 2.2 Deferred members (no longer paying any contributions) 31 December 2014 31 December 2017 Number 2,702 2,439 Account balances* ( 000s) 54,857 51,865 * Account balances include accrued bonuses and interest. Money purchase funds are excluded. 2.3 Pensioner members 3. Financial data The audited Scheme accounts for the year ending 31 December 2017 showed the total market value of the With Profit Section assets was 111,238,000. This is broken down as follows: Asset class 000s % Matching Fund Duration Hedged Credit Fund 29,055 26.1 Diversified Income (bonds) 14,609 13.1 Cash 184 0.2 Interest Rate Swaps 10,952 9.8 Inflation Swaps 211 0.2 Investment Fund Blended Investment Fund 37,688 33.9 Credit Opportunities 4,336 3.9 Stressed Debt Fund 1,579 1.4 Alternatives 2,045 1.8 EDOS* 900 0.9 Gilt Collateral 9,233 8.3 Net current assets and other 446 0.4 Total 111,238 100.0 * Equity derivative overlay strategy As at the valuation date, the Scheme also held assets amounting to 112,150,000 in respect of the Money Purchase Section. These have been excluded for the purpose of this valuation. There were no assets in respect of the Life Cover Section. The auditor s report in the Scheme accounts for the year ended 31 December 2017 states that only the Trustee can rely on the information in the accounts. I have had to rely on information in the audited accounts in carrying out this valuation and must therefore caveat this report to the extent that if the information in the audited accounts is found to be incorrect then the Trustee cannot rely on the results and advice provided in this report. 31 December 2014 31 December 2017 Number 1,103 958 Pension ( 000s per annum) 4,080 3,454 10
Appendix B: Assumptions A summary of the key assumptions used to determine the level of liabilities is as follows: 1.1 Financial assumptions Scheme funding Buy-out FRS102 Discount rate (net of investment expenses): Non-pensioners Pensioners Swaps curve + 2.2% p.a. until 31/12/22 Swaps curve + 0.7% p.a. thereafter Swaps curve with bespoke adjustments based on Punter Southall analysis of the buyout market 2.40% p.a. 2.40% p.a. Retail prices inflation (RPI) Swaps inflation curve Swaps inflation curve 3.20% p.a. Consumer prices inflation (CPI) RPI less 0.8% p.a. RPI less 0.4% p.a. 2.20% p.a. Pension increases after retirement: Inflation capped at 5% Inflation capped at 3% Consistent with CPI inflation curve Calculated using the term-dependent Black Scholes model with inflation volatility of 1% p.a. Consistent with CPI inflation curve 2.25% p.a. 1.95% p.a. 1.2 Demographic assumptions Scheme funding Buy-out FRS102 Longevity (post-retirement) 106%/99% (m/f) S2PA tables CMI_2016 improvement with a long term rate of 1.5% 106%/99% (m/f) S2PA tables CMI_2014 improvement with a long term rate of 1.5%/1.25% (m/f) 106%/99% (m/f) S2PA tables CMI_2016 improvement with a long term rate of 1.5% Early retirement No allowance No allowance No allowance Family statistics 100% married with husbands 3 years older than their wives Age-related proportion married table with husbands 3 years older than their wives 100% married with husbands 3 years older than their wives Future bonuses (other than final bonus on pre-1988 funds) No allowance No allowance No allowance Expenses 1.3m p.a. until 31/12/22 3.5% of liabilities No allowance A description of all the scheme funding assumptions made, together with a description of the derivation of these assumptions can be found in the statement of funding principles in Appendix C. 11
Appendix C: Scheme funding documents As required by the Pensions Act 2004, the Trustee obtained my advice when producing the following documents (which are included in this appendix): statement of funding principles schedule of contributions (incorporating my actuarial certification). The actuary s certificates of the calculation of technical provisions is also included in this appendix. 12
13 The Cheviot Pension actuarial valuation as at 31 December 2017
14 The Cheviot Pension actuarial valuation as at 31 December 2017
15 The Cheviot Pension actuarial valuation as at 31 December 2017
16 The Cheviot Pension actuarial valuation as at 31 December 2017
Actuary s certificate of the calculation of technical provisions Name of Scheme: The With Profits Section of the Cheviot Pension Calculation of technical provisions I certify that, in my opinion, the calculation of the Section s technical provisions as at 31 December 2017 is made in accordance with regulations under section 222 of the Pensions Act 2004. The calculation uses a method and assumptions determined by the Trustee of the Section and set out in the statement of funding principles dated 20 June 2018. Jonathan Punter Fellow of the Institute and Faculty of Actuaries Punter Southall Limited 11 Strand London WC2N 5HR June 2018 17
Appendix D: 1. Addressee of this report Legal and compliance notices This report has been commissioned by and is addressed to the directors of Cheviot Trustees Limited (the Trustee ) in its capacity as trustee of the With Profits Section of the Cheviot Pension (the Section ). The intended user of this report is the Trustee and it is for its exclusive use. Its scope and purpose is to set out in one place the final results of the actuarial valuation of the Section as at 31 December 2017 and to satisfy the legislative requirement for reporting and certifying the results of the valuation, within 15 months of its effective date, and it should not be relied upon for any other purpose. I am providing this report in my capacity as Scheme Actuary and Actuary to the Scheme. This report must be made available to the Statutory Employers within 7 days of it being received by the Trustee. It may not be shared with any other party without my prior written consent, except to comply with statutory requirements. No parties other than the Trustee may rely on or make decisions based on this report (whether they receive it with or without consent). Punter Southall Limited and its employees acknowledge no liability to other parties. Any advice has no wider applicability and is not necessarily the advice that would be given to another client or third party whose objectives or requirements may be different. 4. Advice relating to the valuation The Trustee has considered various pieces of advice in reaching decisions concerning the method and assumptions to be used for the valuation, as follows: My report Actuarial valuation as at 31 December 2014 Advice on method and assumptions dated December 2014; My scheme funding report Actuarial valuation as at 31 December 2014 ; dated June 2015; My Report on pensioner mortality analysis dated March 2016; Peter Black s e-mail of 28 April 2017 on Mortality assumption for the With Profits Section ; My report Actuarial valuation as at 31 December 2017 The regulatory background dated October 2017; My joint paper with P-Solve on funding assumptions presented to the Funding committee at their meeting on 18 October 2017; My note Actuarial valuation as at 31 December 2017 Preliminary results dated February 2018; My report Actuarial valuation as at 31 December 2017 Advice on method and assumptions and preliminary results, dated March 2018; Advice considered at the Trustee s board meeting on 28 March 2018 including my presentation Summary of assumptions and preliminary results of the valuation as at 31 December 2017, dated March 2018, and subsequent updated version dated April 2018 provided to the Funding Sub- Committee. 2. Legal requirements This scheme funding report on the actuarial valuation of the Section as at 31 December 2017 is required under Clause 23.2 of the Scheme s trust deed dated 4 April 2017, as amended and the scheme funding framework introduced by section 224 of the Pensions Act 2004. 3. Technical Actuarial Standards (TAS) compliance This report, and the work undertaken to produce it, is compliant with TAS 100 and TAS 300, set by the Financial Reporting Council. No other TASs apply. 18