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

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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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