UK Actuarial Advisory Firm of the Year
Devon County Council Pension Fund
2013 Actuarial Valuation
Employer Meeting
Graeme D Muir FFA
October 2013
Agenda
Purpose of the valuation
How do we do it?
Funding models and assumptions
Valuation Data
Results
Next Steps
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Purpose of valuations
• Many questions!
Approach depends on question being
asked
• How much do employers need to pay in future to have enough assets to pay benefits?
Ongoing triennial funding valuation
• Help accountants compare
• If we were a plc how much would we need to borrow to finance liabilities?
Annual accounting valuations
(IAS19/FRS17)
• Have we enough assets to meet liabilities?
• How much risk do we leave on the table?
• Different approaches depending on employer situation
Cessation valuations
3
Triennial Funding Valuation
• to certify levels of employer contributions to secure the solvency of the Fund
Set out in LGPS Regulations
• As determined by administering authority
• With some actuarial help!
Also have to look at Funding Strategy
Statement
• Function of Funding Model / investment strategy
• Spreading and stepping
Actuary to “have regard to desirability of maintaining as stable a contribution
rate as possible”
• Statutory/non statutory bodies
• Open or closed admission agreements
Different approaches possible for different
employer types
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How do we do it?
Step 1
• Projection of all possible benefit payments for each member
Step 2
• Attach probabilities to each possible payment to get “expected” payments
Step 3
• Discount “expected” payments to obtain “value”
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Total Cashflows c£14bn
How do we do it?
Look at accrued benefits and future benefits separately
Past Service
• Compare assets with value of accrued benefits
Future Service
• Determine contribution required to meet value of annual accrual of benefits
Calculations completed at
• Whole fund level
• At individual employer level to identify any outliers and for accountants!
But maybe pool similar employers to help with stability
• Price of stability is some cross subsidy
• Complete or partial risk sharing possible
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Assumptions
Price Inflation (RPI)
• Usually difference between fixed interest and index linked gilts
• CPI adjustment required
Salary Increases
• Usually 1-2% pa more than price inflation
• Short term adjustment?
Discount rates
• Depends on purpose and objectives of valuation
Statistical assumptions
• Investigate past experience
• Use national data
• Adjust for actual experience
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Discount Rates
Choice of discount rate depends on the question being asked
Funding valuation
• What contributions are required to build up a fund of assets to meet pension liabilities for a given investment strategy?
Accounting valuation
• How much would a corporate body need to borrow to finance their pension liabilities?
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Discount Rates
Accounting valuation
• Corporate bond yields / cost of borrowing
Ongoing funding valuation
• Expected future investment returns from actual investment strategy
Gilts and bonds – easy….
• Redemption yields
Equities – less easy….
• Fixed risk premium over gilts (Gilt + model)
• Economic model (BW model)
Property/alternatives – keep it simple
• Somewhere between equities and gilts
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Change in Employer Contribution
10
10%
15%
20%
25%
30%
35%Change in Average LGPS Employer Contribution
Gilt Based Discount Rate Economic Discount Rate
Inflation 31 March 2013 31 March 2010
%pa %pa
3.54% 3.75%
- (0.25%)
3.54% 3.50%
2.74% 3.00%
31 March 2013 31 March 2010
%pa %pa
3.38% 3.30%
- 0.80%
3.54% 3.50%
6.92% 7.60%
31 March 2013 31 March 2010
Central Assumptions %pa %pa
6.9% 7.5%
3.3% 4.5%
3.9% 5.6%
6.0% 5.6%
6.1% -
31 March 2013 31 March 2010
%pa %pa
6.1% 6.8%
Pay Increases long term 4.5% 5.0%
short term 2.7% 3.2%
3.5% 3.5%
2.7% 3.0%
Dividend Yield
Implied Inflation
Inflation Premium
RPI assumption
CPI assumption
Smoothed Equity Returns
Bonds type investments
Financial Assumptions
Central Discount Rate
Retail Price Inflation
Pension Increases
Central Real Dividend Grow th
RPI assumption
Equity Return
Smoothed Investment Returns
Equity type investments
Gilt type investments
Property type investments
Absolute return type investments
Financial Assumptions - Summary
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Discount rate function
of actual asset
strategy
Risk adjusted if 75%+ in
equity type investments
Adjust for expenses
Max real discount rate
of 4%
Property returns 75% of
equity return and 25% of gilt
return
Absolute return
20 year LIBOR plus 3%
Statistical Assumptions
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Pre retirement Based on LGPS experience
Post Retirement mortality
SAPS 1 Tables
Fund specific rating
100% Males
90% Females
1.5% pa improvement
factor
Valuation Data - Liabilities
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Key Stats
Number of Members 2013 % 2010 %
Actives 34,144 37% 35,441 41% 45.2 64.1
Pensioners 27,046 29% 24,165 28% 70.2 -
Deferred Members 32,311 35% 27,670 32% 45.9 62.6
Total Members 93,501 100% 87,276 100%
£ (000) £ (000) % Change
Actives 552,786 570,561 (3%)
Pensioners 119,783 95,690 25%
£ £ % Change
Actives 16,190 16,099 1%
Pensioners 4,429 3,960 12%
This Valuation
Average Age
Average
Retirement Age
Actual Pay/Pensions
Average Pay/Pensions
FT Males
21%
PT Females
47%
PT Males4%
FT Females
28%
Pensionable Pay at This Valuation
Year to March 2013 March 2012 March 2011 Total
£ (000) £ (000) £ (000) £ (000)
UK Equities 842,524 Expenditure Retirement Pensions 114,741 104,280 95,628 314,650
Overseas Equities 972,376 Retirement Lump Sums 27,389 35,991 25,906 89,286
Death Benefits 3,356 3,103 3,407 9,866
UK Gilts 232,356 Leavers benefits 5,646 5,940 21,682 33,268
Corporate Bonds 17,167 Expenses 1,689 1,282 1,266 4,237
Overseas Bonds 152,580 Other Expenditure - - - -
Cash 95,181 Total Outgo 152,822 150,597 147,889 451,308
Income Employees Ctbns 34,615 36,114 37,982 108,710
Property 212,946 Employers Ctbns 111,900 116,380 112,098 340,378
Other assets 34,028 Transfer Values 8,647 9,868 11,375 29,890
Alternative assets 447,526 Other Income 88 163 249 500
Investment Income 34,950 43,985 37,517 116,452
Total 3,006,684 Total income 190,200 206,510 199,221 595,930
New money for investment 2,428 11,928 13,814 28,170
Fund Value
Assets at Start of Year 2,683,730 2,606,898 2,403,313 2,403,313
Cashflow 37,378 55,913 51,331 144,622
Change in value 285,575 20,919 152,254 458,748
Assets at End of Year 3,006,683 2,683,730 2,606,898 3,006,683
Annual Returns
Approx Rate of Return (per annum) 11.9% 2.5% 7.9% 7.4%
Assets at This Valuation £(000)
Revenue
Accounts
Global Equities
60%
UK Gilts and Cash
11%
Global Bonds
6%
Property / Alternatives
23%
Assets and Fund Accounts
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Intervaluation Experience
15
Intervaluation Experience
Actual Expected
Investment Return 7.4% pa 6.8% pa
Pay Increases ** 2.0% pa 3.2% pa
Pension Increases 3.5% pa 3.0% pa
Deaths 2,070 1,823
Pension Ceasing £7,860k £8,259k
** includes short term overlay
2013 Mortality Table – “best fit” to 2010-13 experience by amounts
Valuation Results – Whole Fund
• The published 2010 results Last Valuation
• Changes in financial conditions and actual experience Intervaluation
• Pay increases, retirement age, pre retirement leavers and post retirement mortality
Revised Assumptions
• New scheme benefits from 2014 LGPS 2014
• Assume 10% of members opt for 50/50 scheme 10% 50/50
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Valuation Results – Whole Fund
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Valuation Results – Whole Fund
• Stability of employer contributions Main Funding Objective
• Lots of employer variation though Adopt 25 year period for Fund as a whole
• 20 to 27 years to achieve stability Employer recovery
periods
• Step in increases over next 3 years Will still require some
increases for some
2010 2013
Pensionable Payroll £570.6m £552.8m
Recovery Period 30 years 25 years
Total Rate (% of pay) 18.3% 18.8%
Total Contribution (£m) £104.4m £104.1m
Projected Employer Contributions (2013/14) £105m
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Managing Your Deficit
• Standard 25 year recovery period
• Employer range – 20 to 27 years Funding Strategy
• Buffer for adverse experience
• Reduce interest cost
Reduce recovery period if
affordable
• Interest cost more than initial deficit contributions
If period more than c 20 years
• If assumptions borne out in practice
More now means less later
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20 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £183m
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30 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £249m
£110m
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Any questions?
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