UNIVERSITIES SUPERANNUATION SCHEME INSTITUTIONS MEETING 2014 ACTUARIAL VALUATION 4 December 2014 Ali Tayyebi Scheme Actuary
Agenda Valuing Pension Benefits 2011 Valuation Results Key Changes Since Last Valuation Financial and Demographic Experience of Scheme Key Changes to Assumptions 2014 Valuation Results The Options Going Forward Post Valuation Experience Next Steps 1
VALUING PENSION BENEFITS 2
Valuing Pension Benefits Past and Future Service Benefits PAST SERVICE FUTURE BENEFITS Deficit Assets Technical Provisions Cost of benefits for in-service members for each year they stay in service % of pensionable salary Deficit spread over agreed Recovery Period Future service contribution rate Deficit contribution rate 3
2011 VALUATION RESULTS 4
2011 Valuation Results Past service liabilities 31 March 2011 bn Cost of future accrual 31 March 2011 (%) Assets 32.4bn Final Salary members 20.3% Technical Provisions 35.3bn Past service deficit 2.9bn Funding level 91.8% Employee contributions 7.5% Net employer rate 12.8% Employer rate set at 16% of pensionable salaries based on 10 year recovery period 5
KEY CHANGES SINCE LAST VALUATION 6
Key Changes Since Last Valuation Drivers and outcomes Drivers Financial experience of Scheme Outcomes Review of assumptions Demographic experience of Scheme Outlook for long term future Update results and contribution requirements 7
FINANCIAL AND DEMOGRAPHIC EXPERIENCE OF SCHEME 8
Financial Experience of Scheme 2011 2014 Total assets 32.4bn Total assets 41.6bn Growth Risk Reducing Growth Risk Reducing Expected Return between valuations = 6.1% per annum Actual return between valuations = 8.4% per annum 9
Change in Membership Profile 2011 Scheme Membership 290,507 members 2014 Scheme Membership 348,355 members Final Salary active members (139,905) Deferred pensioners (91,048) Pensioners (59,554) Final Salary active members (124,380) CRB active members (43,165) Deferred pensioners (110,430) Pensioners (70,380) 10
Demographic Experience of the Scheme Assumption Salary increases Withdrawals from scheme Detailed analysis in 2011 Early retirement Ill health retirement No change Likelihood of beneficiary pension Mortality - base table Sense check using inter-valuation experience 11
KEY CHANGES TO ASSUMPTIONS 12
Key Changes to Assumptions Drivers for Change Assumption Discount rate Drivers for change (1) Reduced outlook for future investment returns (2) Allowance for long term risk-reduction Inflation Risk Premium (IRP) (1) Allowance for long term risk-reduction Mortality (future improvements) (1) Further evidence of future improvements (2) Market trends to strengthen assumption 13
Key Changes to Assumptions Discount Rate Assumption Change Initial discount rate Discount rate reduced from 6.1% p.a. to 5.2% p.a. to reflect reduced market based outlook for future investment returns Long term trend Gradually reducing the discount rate to 4.1% p.a. 14
Main Assumptions Rationale for long-term risk-reduction 56.1bn c.30% increase in liabilities Trustee s aim not to increase reliance on covenant 20 years 2014 Self-sufficiency Liabilities (valuation date) 2034 Self-sufficiency Liabilities (in today s terms) 15
Key Changes to Assumptions Mortality - Strengthening Future Improvements Past improvements in population projected with various assumptions Life expectancy at age 65 2014 valuation 2011 valuation Category 2011 Life expectancy from 65 2014 Life expectancy from 65 Male aged 65 24.0 24.3 Female aged 65 25.9 26.6 Male aged 45 25.7 26.4 Female aged 45 27.9 28.9 03 December 2014 16
2014 VALUATION RESULTS 17
2014 Valuation Results Current Benefits Past service liabilities 31 March 2014 bn Total cost of future accrual 31 March 2014 (%) Assets 41.6bn Final Salary members 30.3% Technical Provisions 53.9bn Past service deficit 12.3bn Funding level 77.2% CRB members 19.2% Combined average 28.4% Pre cost sharing Member contribution rates (% of pensionable salaries) Final Salary members 7.5% CRB members 6.5% 18
Reconciliation of the 2011 and 2014 results Past Service Deficit 2011 deficit Interest on deficit -2.9-0.6 Deficit Contributions 0.7 Reduced market-return outlook -7.6 Long term inflation Miscellaneous Investment returns 0.9 0.7 2.7 Change to other assumptions Planned reduction in investment risk -4.4-1.8 2014 deficit -12.3-20.0-10.0 0.0 10.0 bn 19
Reconciliation of the 2011 and 2014 results Future Service Rate 2011 Rate 20.3% Reduced market-return outlook 5.3% Long term inflation -0.6% Membership profile -1.4% Change to other assumptions 1.1% Planned reduction in investment risk 3.7% 2014 Rate 28.4% -10% 0% 10% 20% 30% % of Pensionable Salaries 03 December 2014 20
2014 Valuation Results Deficit Recovery Contributions 53.9bn Deficit contributions Additional investment returns Recovery Plans 15 years 20 years Member contribution rates Deficit conts 9.8% 6.5% Future accrual 28.4% 28.4% 41.6bn Current Assets Total rate 38.2% 34.9% Employee rate 12.5% 11.3% Technical Provisions Recovery Plan Net Employer rate Includes cost sharing 25.7% 23.6% 21
Sensitivities to 2014 valuation results Initial discount rate changed by 0.25% p.a. Change glide-path target for 20 year discount rate by 0.25% p.a. Change in Technical Provisions deficit Change in total (employer + employee) contribution rate % of pensionable salaries 15 year recovery period Change in total (employer + employee) contribution rate % of pensionable salaries 20 year recovery period + / - 1.0bn + / - 0.9% + / - 0.7% + / - 1.6bn + / - 2.6% + / - 2.0% RPI inflation changed by 0.1% p.a. + / - 1.0bn + / - 1.7% + / - 1.4% Salary increases changed by 0.5% p.a. Long-term life expectancy improvement trend increased to 1.75% p.a. + / - 1.3bn + / - 2.4% + / - 2.1% + 0.6bn +1.1% +0.9% 22
Scope for Limiting Increases in Contribution Requirements Assumptions and length of recovery period Benefits past service deficit Benefits future service Limited impact Significant impact 23
THE OPTIONS GOING FORWARD 24
The Options Going Forward Benefit Options Currently Being Considered by Stakeholders Benefits past service deficit Benefits future service options Removal of Final Salary link Move to CRB Alternative accrual rates Cap on pensionable salary Member contribution rates DC top-up Significant impact 25
POST VALUATION EXPERIENCE 26
Post Valuation Experience Probability of contribution rates exceeding 18% -21% at the next valuation? Test 2 27
NEXT STEPS 28
Next Steps Completion of consultation on assumptions Further consideration of benefit design options between stakeholders Consultation on any proposed benefit changes Finalisation of valuation and contribution requirements Submission of documents to the Pensions Regulator 29
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