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Hertfordshire County Council Pension Fund

Barry McKay FFA

7 February 2013

Employers’ Forum

2

Today’s discussion

LGPS Reform

Preparation for the 2013 valuation

Outlook for 2013 valuation Measurement and management

Employer issues

LGPS reform

4

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?

5

Life expectancy increasing faster than SPA

50

55

60

65

70

75

80

85

90

95

100

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Life expectancy and State Pension Age

Men: Life expectancy from birth Women: Life expectancy from birthMen: Projection of life expectancy Women: Projection of life expectancyMen: SPA Women: SPA

Population life expectancy vs State Pension Age

LGPS costs could continue to increase

6

New LGPS from 2014: funding impact Existing Scheme Proposed New Scheme

Benefit Type Final Salary CARE with CPI revaluation

Accrual Rate 1/60th 1/49th

Retirement Age 65 State Pension Age

Member Contribution Rate

Average 6.5% Full-time equiv. pay

Average 6.5% Actual pay

Vesting Period 3 months 2 years

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 (“best of”)

Introduction of a “50/50” option to bolster LGPS participation

“Cap and collar” cost control

7

Financial impact on LGPS employers No impact on existing deficits (past service)

Accrued rights to 2014 are protected

Modest savings on new benefits (future service) c1%-2% of pay across whole fund?

Savings will vary by employer: Depends on membership profile Changes to member contributions Take up of “50/50” option

Preparation for 2013 valuation

9

2013 valuation: what employers need to do

1. Liaise with pensions team

2. Data correct and up to date

3. Watch out for communications

4. Consider early warning report

5. Look out for Funding Strategy Statement (FSS) consultation

10

Data submission for the 2013 Valuation

Rely on accuracy of membership data

Administering Authority require information from employers

Changes in membership Correct salaries/contributions paid

Missing/incorrect data could result in: A higher value being placed on future benefit promises A higher contribution rate Additional actuarial fees for you

11

Pensionable Pay: Impact of incorrect data

Example (Active Member)

Sex DOB Service Date

FTE Salary

£

Liability £

M 01/01/1954 01/01/1998 10,000 51,000

M 01/01/1954 01/01/1998 15,000 76,000

12

Valuation timetable

March 2013

New Rates

Payable 2012/Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

March 2014 December 2013

Preparation for valuation

Data for actuary

Actuary does his sums

Valuation results Consultation on FSS

Finalise employer contributions

Outlook for 2013 valuation

14

Market movements since 2010

80

90

100

110

120

130

140

31 Mar 2010 31 Mar 2011 31 Mar 2012

Sterling total returns of major asset classes (rebased to 100 at 31 Mar 2010)

UK equities (FTSE All Share) Index-linked gilts (FTSE over 15 years) Assumed asset return

15

Sovereign Debt Crisis and the impact on government bond yields

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

FTSE UK Gilts Annual Yield Series (over 15 years) Inflation

16

We are living longer – but local variation

High life expectancy

Mid life expectancy

Low life expectancy

17

New scheme cost differs between employers

-1.5%

Employers

New scheme costs more

Average saving

New scheme saves money

Winners and losers

18

Likely impact of key drivers since 2010

Key driver Deficit Contribution rate Market conditions

Investment returns

Life expectancy

New LGPS 2014

Overall Impact

19

40%

50%

60%

70%

80%

90%

100%

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Fund

ing

leve

l

Estimated funding level from 31 March 2010 to 31 December 2012

74.3%

68.3%

20

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 significantly between employers

For 2013 there are lots of moving parts!

Employer issues

22

0

10

20

30

40

50

60

Every employer is different

Source: Hymans Robertson, based on Hertfordshire County Council Pension Fund as at 31 March 2010

Range of employer funding levels

Hot spot

Funding Level

Num

ber o

f em

ploy

ers

23

Assessing employer covenant

Issues Likelihood and impact if employer leaves?

Assessing employer risk Tax-raising powers Type of body (Scheduled, TAB, CAB) Open or closed to new entrants Guarantor in place? Other form of security? Funding position/size of liabilities

24

Next steps

Data submission to the Administering Authority

Pensions reform to be finalised

Increases in contributions required

But can manage contribution increases...

...without any long term damage to the Fund...

...depending on time horizon and financial security

Dialogue essential

Any questions? Thank you