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Warwickshire County Council Pension Fund

Warwickshire County Council Pension Fund. Annual meeting. Richard Warden Fund Actuary 23 November 2012. Contents. Outlook for 2013 valuation LGPS reform Risk management. Outlook for 2013 valuation. Why do we do a valuation?. We have to!

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Warwickshire County Council Pension Fund

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  1. Warwickshire County Council Pension Fund • Annual meeting Richard Warden Fund Actuary 23 November 2012

  2. Contents Outlook for 2013 valuation LGPS reform Risk management

  3. Outlook for 2013 valuation

  4. Why do we do a valuation? • We have to! • Assess how well pension promises are covered • Monitor experience vs. assumptions • Recommend employer contribution rates for next 3 years • Manage potential risks to the Fund & employers

  5. Value today of £100 in 1 years time Higher inflation => need more cash today Lower future investment return => need more cash today

  6. Summary of the valuation process Data Benefits FSS Assumptions Past service surplus or deficit? Value Assets & Value Liabilities Administering Authority/ Employer Consultation Rates and Adjustments Certificate Valuation Report

  7. Financial Assumptions Inflation Pay increases Pension increases Investment return Consider: Economic outlook Actual Scheme assets Historical pay growth Valuation assumptions Amounts paid: Probability of payment : • Demographic Assumptions • Life expectancy • Age at retirement • Withdrawals • Marriage statistics • Consider: • Population trends • Members’ social status • Past Scheme experience

  8. Life expectancy

  9. Future improvements

  10. Recap on 2010 valuation

  11. General economic environment Pension schemes are not immune to this

  12. Falling funding level

  13. What’s in the mix? • Bigger deficits • Contribution stability • Diverse employers • Pay restraints • Stretched assumptions • Increasing maturity • Pension reform • Budget cuts Warwickshire 2013 valuation

  14. Valuation timetable • October 2012: • Valuation strategy meeting • Early 2013: • Pre-valuation meetings to discuss valuation process • Likelihood modelling to test contribution strategies • Summer 2013: • All data requirements provided to actuary • Data validated and declared “fit for purpose” • Autumn 2013: • Initial valuation results – whole fund • Meetings to agree final valuation assumptions • Final valuation results – individual employers • Winter 2013: • Agreement on final contribution rates for employers • By 31 March 2014: • Final valuation report (including Rates & Adjustments certificate)

  15. Outlook for 2013 Compared against 2010 valuation: • Funding levels likely to be lower • Deficits likely to be bigger • (Theoretical) contribution rates likely to be higher • Results will vary between employers • ...the only certainty is uncertainty

  16. LGPS reform

  17. Why reform public sector pensions? • Living longer • Long term sustainability and affordability • Final salary system unfair? • Public / private sector divide • Government short term objective – cashflow on unfunded (PAYG) schemes?

  18. Working longer Life expectancies are based upon historic data from the Office for National Statistics and the Human Mortality Database (www.mortality.org). Projected life expectancies use the 2008-based ONS principal projections. All life expectancies are period life expectancies (are based on longevity at the date of retirement and do not capture changes in longevity that will occur in subsequent years). State Pension Ages shown are based upon our understanding of the State Pension Age changes proposed in 2010 Spending review.

  19. New LGPS from 2014 • Accrued rights protected (incl. retirement age, R85, final salary link) • Existing scheme underpin for members within 10 years of NPA (age 65) at 1 April 2012 • Introduction of a “50/50” option to bolster LGPSparticipation

  20. Uncertainties remain... • Details to be thrashed out: • Finer details of scheme design • Cost management mechanism (cap and collar) • Hutton governance recommendations (tPR oversight?) • Impact of “50/50” option: • Anticipated take-up? • Employer cost and cashflow implications • Interaction with auto-enrolment • Process for implementing new scheme .....all within a very challenging timescale!

  21. Financial impact in the LGPS Taken in isolation and ignoring changes in market conditions and payroll etc.. • No impact on existing deficits (past service) • Accrued rights to 2014 are protected • Modest savings on new benefits (future service) • c1.5%-2% of pay across whole fund • Savings will vary by employer: • Depends on member profile, member conts, 50/50 option • Measures to contain future cost increases • SPA link and “cost management” (cap and collar) Unlikely to see employer contributions reduce

  22. How CARE works For example, Tom earns £20,000, so his pension in year 1 is worked out as: £20,000 x 1/49th = £408 Maintaining your pension’s value Revalued by 4% each year The £408that Tom earns in year 1 is revalued at the end of the next year. So at the end of year 2, this part of Tom's pension is £408 x 1.04 = £424. The pension continues to be revalued until you retire Year 1 retirement pension Tom's pension for year 1 is £860 after 20 years' service.

  23. Your pension at retirement Adding your other years’ pension pots. You receive a new pension ‘pot’ for each year you are a member Add up the pension you earned each year (after it has been revalued) to find your total pension Annual pension at retirement If Tom has a 4% salary rise each year, by adding all of the other years' pension pots together, he could expect a pension of £17,200 a year after 20 years' service.

  24. Risk management

  25. Markets since 2010 Lots of volatility

  26. Contribution Stability Mechanism 30 20 Contributions % pay Theoretical contributions 10 Actual contributions paid 0 2007 2010 2013 2016 2019 Underpay in bad times, overpay in better times

  27. 5000 projections Assess the likelihood of different outcomes

  28. Effect of stabilising contributions Funding level over 24 years Without stabilisation Median: 129% 83% 49% With stabilisation Stabilisation = +0.5%/-2% p.a Median: 119% 70% 35% Can we still stabilise without harming funding level?

  29. Respite from 2014 scheme reforms? Lower cost of benefits but past service shortfall remains

  30. Variable impact on employers Change in employer contributions (% pay) -1.5% Employers

  31. Be aware of your hot spots Range of employer funding levels Source: Hymans Robertson, based on a large LGPS fund. Hot spot

  32. Thank you

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