UK Actuarial Advisory Firm of the Year
London Pensions Fund Authority
2013 Actuarial Valuation
[email protected]
[email protected]
November 2013
Agenda
Purpose of the valuation
How do we do it?
Assumptions
Results
Next Steps
Managing Deficits
Questions
2
Purpose of valuations
Approach
depends on
question being
asked
• Many questions!
much does each employer need
Ongoing triennial • How
to pay in future to have enough
funding valuation
assets to pay benefits?
Annual
accounting
valuations
(IAS19/FRS17)
3
• Help accountants compare
• If we were a plc how much would we
need to borrow to finance liabilities?
Triennial Funding Valuation
Set out in LGPS
Regulations
Also have to look at
Funding Strategy
Statement
Actuary to “have regard to
desirability of maintaining
as stable a contribution
rate as possible”
Adopt different
approaches for different
employer types
4
• to certify levels of employer contributions to
secure the solvency of the Fund
• As determined by administering authority
• With some actuarial help!
• Function of Funding Model / investment strategy
• Spreading and stepping
• Statutory/non statutory bodies
• Open or closed admission agreements
• Essentially a collection of over 150 funds
How do we do it?
Step 1
Step 2
Step 3
• Projection of all possible
benefit payments for each
member
• Attach probabilities to
each possible payment to
get “expected” payments
• Discount “expected”
payments to obtain
“value”
Fund Cashflows (past service only)
£500m
£450m
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
Actives
Deferreds
Pensioners
Total Cashflows - £17bn
1
6
11
16
21
26
31
36
41
46
51
Year
5
56
61
66
71
76
81
86
91
96
How do we do it?
Calculations completed at individual employer level
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
Recovery plan to fund any deficit
6
Assumptions
Price Inflation (RPI)
• Use Bank of England Inflation Curve
• Adjust for CPI
Salary Increases
• Initially inflation increasing to CPI plus 1.8%
Discount rates
• Funding :
Employer-specific risk-adjusted expected investment
return
• Accounting: Bond yield curve
Statistical assumptions
• Pre retirement :
• Post retirement:
7
GAD assumptions
Club Vita with CMI 2012 (min 1.5%) improvement
Open employers
Open employers are assumed
to carry on indefinitely in the
Fund (as currently)
Employers are assessed
based on strength of
covenant
Strength of covenant then
determines the risk allowance
in the discount rate
8
Closed employers
No more active members joining means that
employers’ leaving dates can be estimated
Cessation debt payable on exit is often
substantial
Can modify the funding target to plan for this
• the “projected cessation” approach
Discount rate before leaving is calculated in
the same way as for open employers
9
Closed employers
Summary of Financial Assumptions
Assumption
Value
CPI inflation
2.7%
Pay increases
Long term
CPI plus 1.8%
Short term
CPI
Discount rates
Ongoing
Employer contributions while
participating in the Fund
Cessation
11
5.9%
4.5% to 5.9%
3.1%
Sensitivity of assumptions
• Central assumptions
Fund Cashflows (past service only)
£500m
£450m
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
Actives
Deferreds
£17bn
£17bn
1
6
11
16
21
26
31
36
41
46
51
Year
12
Pensioners
56
61
66
71
76
81
86
91
96
Sensitivity of assumptions
• What if inflation is 0.5% higher?
Fund Cashflows (past service only)
£500m
£450m
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
Actives
Deferreds
1
6
11
16
21
26
31
36
41
46
51
Year
13
Pensioners
£20bn
£20bn
56
61
66
71
76
81
86
91
96
Sensitivity of assumptions
• And what if people live for longer as well?
• 2.5% long-term improvement instead of 1.5%
Fund Cashflows (past service only)
£500m
£450m
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
Actives
Deferreds
1
6
11
16
21
26
31
36
41
46
51
Year
14
Pensioners
£23bn
£23bn
56
61
66
71
76
81
86
91
96
Employers’ Contributions
15
Accrual of new
benefits
• Percentage of salaries for new benefits
• Between 14% and 40%
To pay for past
service deficit
• Cash amounts, paid over either average time to
leaving or 17 years
• Funding levels between 50% and fully funded
To contribute
towards expected
cessation amount
• Closed employers only
• Combination of percentage of salaries and cash
amounts, paid over average time to leaving
• Can be significant if mature active membership
Next Steps
Individual
employer
results
16
Communication
and discussion
of results
Final report
Managing Your Deficit
Funding Strategy
• Open employers with a strong covenant - 17 year recovery period
• Mature closed employers may have very short recovery period
Reduce perceived risk to the Fund?
• One-off contribution?
• Guarantees from Government or parent organisations?
• Security or escrow account?
Reduce recovery period if affordable
• Buffer for adverse experience
• Lower pension costs in longer term
More now means less later
• If assumptions borne out in practice
17
20 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £185m
18
10 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £140m
19
Any questions?
20