25 October 2004
NORTH YORKSHIRE PENSION FUND
2004 Valuation Initial Results
Chris Hull FIA
Mercer Human Resource Consulting Limited is regulated by the Financial
Services Authority and is a member of the General Insurance Standards
Council
Registered in England No. 984275 Registered Office: Telford House, 14
Tothill Street, London SW1H 9NB
Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
2
Purpose
Review contribution programme
Funding
strategy/
principles
Investment
strategy/
structure
Contribution
programme
Deficit
recovery
period
Mercer Human Resource Consulting
Employer
consultation
3
LGPS Funding
 Ongoing “future service” cost
– depends on current
employees
 “Past service” adjustment
– offset or addition depending on
assets compared to liabilities
– depends on past experience
Mercer Human Resource Consulting
4
Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
5
Key Financial Assumptions
2001 valuation
Pension increases = inflation
Salary increases = inflation + 1.5% p.a.
Investment return = gilt yields + 1.0% p.a.
Mercer Human Resource Consulting
6
2001 Valuation
Employer Contributions
Cost of ongoing accrual
17.4%
Less
Employee contributions
5.8%
11.6%
Plus
Adjustment for deficit
6.1%
Average employer rate
(excluding early retirement payments)
17.7%
Deficit spread over future working lifetime of 15 years.
Mercer Human Resource Consulting
7
Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
8
2004 Funding Strategy - Targeted
Funding



Integrated funding and investment strategy to target
agreed funding level over a period
Achieved through combination of “prudent” level of
investment out-performance, increased contribution
input and/or extended recovery
Link out-performance assumptions to investment
strategy adopted and liability profile
Mercer Human Resource Consulting
9
Equity Risk Premium
Summary of historical annual return differential between
UK equities and UK Government gilts
Actual equity risk premium from 1903 to 2002
9
8
7
Frequency
6
5
4
3
2
1
0
40%
36%
32%
28%
24%
Actual equity risk premium
20%
16%
12%
8%
4%
0%
-4%
-8%
-12%
-16%
-20%
-24%
-28%
-32%
Mercer Human Resource Consulting
10
Equity Risk Premium
Expected outperformance of
equities over gilts
Valuation Model:

Prudence or best estimate?

Confidence in the future?

Variation with Market Conditions?
Mercer Human Resource Consulting
11
Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
12
Membership
10,494
22,134
31 March 2004
44,849
12,221
Pensioners
18,398
Deferreds
Actives
9,650
31 March 2001
35,745
7,697
Mercer Human Resource Consulting
13
Financial background
Asset returns
140
120
100
80
60
A pr - 0 1
Oct-01
UK Equi ti es
A pr - 0 2
Over seas Equi ti es
Mercer Human Resource Consulting
Oct-02
A pr - 0 3
Over 15 Year Gi l ts
Oct-03
A pr - 0 4
Over 5 Year Index-Li nked Gi l ts
14
2004 Valuation
Key Assumptions
2001
2004
Fixed interest gilt yields
4.6%
4.6%
Index linked gilt real yields
2.3%
1.8%
Implied inflation
2.3%
2.8%
-pre-retirement
1.0%
2.0%
-post-retirement
1.0%
0.5%
1.5%
1.75%
Asset out-performance
Real salary growth assumption
Mercer Human Resource Consulting
15
2004 Valuation
Financial Assumptions
Past Service (current Future Service (long
yields basis)
term basis)
Pension increases
2.8%
2.5%
Earnings increases
4.55%
4.25%
pre-retirement
6.6%
6.5%
post-retirement
5.1%
6.5%
Investment return:
Assets
Mercer Human Resource Consulting
market value
16
2004 results
MV of assets
Past service liabilities
Deficit
£765.8m
£1,290.3m
£524.5m
Funding level
59.4%
Future service rate (After
removal of Rule of 85
terms)
10.4%
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2004 Results
Analysis of past service shortfall
£m
-187
-170
Deficit at 31.3.01
Investment
returns
-120
-24
-23
-524
0
-100
-200
-300
-400
-500
-600
Gilt yields and
other assumptions
Salary growth
Other
Deficit at 31.3.04
2004 funding level 59.4% (79.5% 2001)
Mercer Human Resource Consulting
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Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
19
Effect of Extended Deficit Recovery
Projected deficit funding payments over 15 and 30 year periods
Payments made as a percentage of projected payroll
15 year period
Deficit funding payment (£m)
30 year period
0
5
10
15
20
25
30
Projection period (years)
Mercer Human Resource Consulting
20
2004 Results
Average Employer Contributions
20 year
25 year
30 year
Recovery
Recovery
recovery
Future service (assumes
removal of Rule of 85 terms)
10.4%
10.4%
10.4%
Deficit Recovery contributions
10.1%
8.3%
7.1%
Average required rate
(excluding early retirement
costs)
20.5%
18.7%
17.5%
2001 average target rate was 17.7% of pensionable payroll
30 year period determined by PFC as maximum allowable
Mercer Human Resource Consulting
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Next Stages

Consultation with employers on key issues
– Deficit recovery
– Bespoke investment strategies

Process individual employer results

Consider phasing of contribution increases where
required
Mercer Human Resource Consulting
22
Agenda

Purpose of valuation

Review 2001 results

Key assumptions and link to Investment Strategy

2004 Results

Deficit Recovery

FRS17
Mercer Human Resource Consulting
23
FRS17 - Overview

Detailed disclosure requirements

Charge cost of accruals, not contributions

Surplus/deficit not amortised through Revenue
account
 Balance sheet asset/liability
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FRS17 comparison with actuarial
valuation
FRS17


More prescriptive
Underlying discount rate = currently 3½% real
determined by HM Treasury

2004/5 SORP changing to Corporate Bond yields
basis (approach to transition not yet certain)

Immediate recognition of past service effects

Includes unfunded benefits (e.g. CAY)
Mercer Human Resource Consulting
25
FRS17 comparison with actuarial
valuation
The Valuation

Long term funding plan

Assumptions not prescribed, and can include
allowance for equity outperformance

Flexibility in treatment deficits
– Length of recovery period
– Phasing of contribution increases
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