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Preparation for the 2019 valuation

East Sussex Pension Fund Richard Warden Fund Actuary 23 November 2018. Preparation for the 2019 valuation. Quiz – Strictly Come Pensions. In what year was John Logie Baird born? 1888 1900 1879 Which celebrity attended school near Lewes? Daniel Radcliffe Tom Hardy Piers Morgan

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Preparation for the 2019 valuation

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  1. East Sussex Pension Fund Richard Warden Fund Actuary 23 November 2018 Preparation for the 2019 valuation

  2. Quiz – Strictly Come Pensions • In what year was John Logie Baird born? • 1888 • 1900 • 1879 • Which celebrity attended school near Lewes? • Daniel Radcliffe • Tom Hardy • Piers Morgan • How many calories does the average salsa dancer burn in one hour of dancing? • 0-200 • 200-400 • 400-600

  3. How many pages are in the draft Withdrawal Agreement of the UK from the EU? • 585 • 695 • 1,033 • The current employer contribution rate for the unfunded Fire Scheme is 17.6% of pay. What size of increase will arise due to the cost cap and a change to the Government’s discount rate? • 4.2% of pay • 8.5% of pay • 12.6% of pay • How many participating employers are in the East Sussex Fund? • 155 • 132 • 180

  4. Agenda • What is a valuation? • Clean data and its importance • What has happened since the 2016 valuation? • 2019 valuation planning • Hot topics

  5. What is a valuation? Subtitle to go here

  6. What is an actuary?

  7. The Role of the Fund Actuary ......... all on behalf of administering authority

  8. How the Fund works Investment returns East Sussex Pension Fund Benefits to members and dependants Member contributions Employer contributions Determined by investment strategy & manager performance Determined by LGPS Regulations Must meet balance of cost over longer term

  9. Why we do a valuation • Calculate employer contribution rates • Compliance with legislation • Analyse actual experience vs assumptions • Review Funding Strategy Statement • Part of continual ‘health check’ on fund solvency

  10. Valuation begins at member level Lump Sum Contributions Expenditure Member’s Pension Dependant’s Pension Income 40 65 85 Death Retirement Recruitment

  11. Valuing all members We project future cashflows for every member to build up the picture for the whole fund

  12. Valuation ‘health check’ Liabilities Assets Managers Benefits earned to date Assets today Most LGPS funds have not met their funding target for past service Comparison is commonly referred to as “funding level”

  13. Approach to setting contributions Liabilities Assets Managers Benefits earned in future Future investmentoutperformance Where to draw this line? Future contributions Benefits earned to date Assets today The key valuation decision is the balance of contributions and investment performance

  14. Clean data and its importance

  15. What data are we talking about? Membership data Cashflow data Employer circumstances Liabilities Assets Funding plan

  16. The importance of clean data Employers Ultimate Goal Correct Information Members Informed Decision Making Data Quality Employers Administering Authority Actuary

  17. Impact of incorrect dataPensionable Pay: Example (Active Member) +50%! Please note – all figures and calculations contained herein are based on a number of assumptions and are therefore for illustrative purposes only.

  18. Impact of incorrect dataDate of Birth: Example (Pensioner) +51%! Please note – all figures and calculations contained herein are based on a number of assumptions and are therefore for illustrative purposes only.

  19. How you can help

  20. What has happened since the 2016 valuation? Subtitle to go here

  21. East Sussex - returns since 2016 2019 2019 ? Total return of c30% is ahead of 2016 expectations

  22. Outlook for investment returns – March 2016 Future investment return vs risk

  23. Outlook for investment returns – Sept 2018 Future investment return vs risk Outlook for future investment returns broadly similar

  24. Will we keep living longer? What does this mean for the LGPS?

  25. Observed life expectancies in East Sussex Source: Club Vita research based on VitaBank as at November 2018 PH1 2AF PH1 2AE

  26. One size fits none DAVE TONY

  27. Two steps to calculate life expectancy Baseline mortality Snapshot of current state of longevity Future trends How longevity will change in the future

  28. Improvements slowing or just volatility? Average deaths per week Austerity, flu, cold winters? Source: ONS weekly deaths figures

  29. What influences future trends? POSITIVE DRIVERS DAVE NEGATIVE DRIVERS POSITIVE DRIVERS TONY NEGATIVE DRIVERS

  30. VitaSegments trend analysis Source: PLSA / Club Vita Longevity Trends Report Slowdown in life expectancies should reduce liabilities and employer contributions

  31. 2019 Valuation Planning Subtitle to go here

  32. 2019 valuation timeline • Q4 18 – Q1 19 • Pre-valuation work: • Planning & employer liaison • Data cleansing • Long term strategy modelling April - June 2019 Data submitted by employers June - August 2019 Data cleansed and submitted to actuary August – September 2019 Actuarial calculations processed.Whole Fund results issued October 2019 Employer results reviewed and funding and investment strategy discussed November 2019 Employer Forum Funding Strategy Statement (FSS) drafted December 2019 FSS consultation started Individual employer results prepared and issued January - February 2020 Consultation of FSS and employer rates Individual employer meetings March 2020 Final valuation report signed off by 31 March 1 April 2020 New contributions start to be paid.

  33. Hot topics Subtitle to go here

  34. Hot topics • National initiatives • Cost Cap • GAD Section 13 • Quadrennial Valuations • SAB Separation Project • Other • Exit Credits Impact on 2019 valuation?

  35. What is cost management? Secondary contribution Aim is to ensure affordable and sustainable public sector pensions

  36. How does cost management work? 21.5% of pay 19.5% of pay E’er 13% E’er ??% 17.5% of pay E’ee 6.5% E’ee 6.5% 31 March 2014 31 March 2016 Benefits are amended if 2% of pay buffer is breached.

  37. Cost Cap Valuations x 2 • Trigger change if cost +/- 2% of pay • Excludes actual investment returns, changes in financial assumptions (future salary, inflation), 50/50 uptake • If breach, changes to benefits to reset cost to middle of range 1 • Similar to above • Includes uptake of 50/50 • Done before HMT • Cost has reduced from 19.5% to 19.0% • Resultant changes to benefits or employee contributions will feed into HMT cost cap 2 Changes to benefits or employee contributions are effective from 1 April 2019

  38. Cost cap valuation in unfunded schemes • Trigger change if cost +/- 2% of pay • Excludes actual investment returns, changes in financial assumptions (future salary, inflation) • If breach, changes to benefits to reset cost to middle of range • Initial results suggest saving of c.3% of pay • Benefit improvement will be implemented 1 • Similar to above • Includes uptake of 50/50 • Done before HMT • Cost has reduced from 19.5% to 19.0% • Resultant changes to benefits or employee contributions will feed into HMT cost cap 2

  39. Section 13 valuation A high level health check on funding in the LGPS

  40. Government Actuary’s Department www.gov.uk/gad Overview of 2016 Local Valuations in E&W • Funding levels have improved • 2013 87% => 2016 95% (SAB standardised basis) • Mostly due to better than expected asset returns • Also reduced life expectancy a factor • Actuaries more cautious about economic outlook => for many funds average employer contribution rates have increased East Sussex: green flags, ranked 10th out of 89 funds based on standardised assumptions

  41. Quadrennial valuations • Brings LGPS funding valuations into line with public sector cost sharing valuations • Four years too long for some LGPS employers? May need “interim” valuations 2026 “interim” 2022 “Interim” 2024 Quadrennial 2028 Quadrennial 2028 Cost Cap Valn 2016 Cost Cap Valn 2024 Cost Cap Valn 2019 valuation will go ahead

  42. The SAB ‘separation project’ Two options (separation within existing structures, or via new structures) currently under review

  43. Exit credits • Affects all cessations triggered from 14 May 2018 • Ceasing employers entitled to receive any funding surplus via an “exit credit” • Implications for both funds and employers: • no transitional arrangements • refund is not taxable • is funding risk truly symmetrical? • communication and documentation • “Pass-through” will become Fund’s default option

  44. 2019 Valuation - summary Expect contribution rates to remain fairly steady

  45. Thank you

  46. The material and charts included herewith are provided as background information for illustration purposes only. It is not a definitive analysis of the subjects covered, nor is it specific to circumstances of any person, scheme or organisation. It is not advice and should not be relied upon.  It should not be released or otherwise disclosed to any third party without our prior consent. Hymans Robertson LLP accepts no liability for errors or omissions or reliance upon any statement or opinion.

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