Hampshire Pension Fund Annual Employers Meeting 23 October 2015

Hampshire Pension Fund Annual Employers Meeting

23 October 2015

Fire Alarms• Should fire alarms sound, please

make your way back to the Main Entrance and exit onto Sussex Street

• Turn left and walk to the end of Sussex Street, cross the road and go past the white barrier to the Assembly Point, which is outside the Great Hall on Castle Avenue

Councillor Mark Kemp-GeeChairman, Pension Fund Panel & Board

Hampshire Pension FundAnnual Employers Meeting

23 October 2015

Welcome

Today’s programme10:00 Chairman of the Pension Fund Panel & Board – Cllr

Mark Kemp-Gee

10:10 Annual Report for 2014/15 – Carolyn Williamson10:20 2014/15 Accounts and Fund Performance – Andrew

Boutflower10:30 Economic and market outlook – Carolan Dobson10:40 Update from the Fund Actuary – Funding Update –

Joel Duckham11:20 Coffee Break11:35 Pensions Administration update – Nick Weaver11:45 Update from the Fund Actuary – Employer

Considerations– Alison Murray12:30 General question and answer session12:45 Close

Carolyn WilliamsonDirector of Corporate Resources

Hampshire Pension Fund

Annual Report for 2014/15

Annual report for 2014/15Part of the Pension Fund’s communication strategy with Fund employers, alongside: this Annual Employers Meeting the Employer’s Guide employer training and liaison meetings the website at www.hants.gov.uk/pensionsAvailable electronically on the Pension Fund’s websiteWe would like your comments please on the Annual Report and this Annual Meeting

Annual report for 2014/15 - ContentsInvestment returns in 2014/15

Accounts for 2014/15Membership reportStatutory statements – revised and updatedNew for 2014/15 based on updated guidance• more detail on the Panel and their

training and development• greater focus on risk managementDoes the Annual Report meet your needs?

At 31 March 2015 - 6.3% more scheme members

38442 38807 39172 39538 39903 40268 40633 40999 41364 41729 42094 -

10,000

20,000

30,000

40,000

50,000

60,000

Contributors

Pensioners

Deferreds

Number of contributors by employer

31 March 2015

Key issues in the last 12 months Continuation of auto-enrolment for employers Implementing the new Pensions

Administration system- UPM Applying the Fund’s new Investment Strategy

– starting to retender investment management contracts

Retendering the contract for the Pension Fund’s actuary – Aon Hewitt reappointed

Responding to further Government consultations on Cost Savings and Governance

Applying for DCLG approval for a Joint Pension Fund Panel & Board – conditional approval granted

Current challenges Continuing to monitor investment

manager performance, taking a phased approach to the retendering of contracts

Bedding in the new UPM system Responding to the Government’s

proposals for pooling investments Preparation for the 2016 actuarial

valuation Responding to scheme member

investment queries e.g. investments in fossil fuels

Pension Fund Panel & Board

Pension Fund Panel & Board• Important to give employers and scheme

members input to key Pension Fund decision making (different to many other funds)

• Single committee should be more efficient and effective

• Try to ensure fair representation – new opportunities for deferred scheme member and non-Local Authority employer

• Closing date for applications for new roles is 6 November, details are on the Pension Fund website

• Government approval is conditional on us reporting back next year – please let us have your feedback

Any questions?

2014/15 Annual Report

Andrew BoutflowerDeputy Investments and Borrowing Manager


2014/15 Accounts and Fund

Performance

Accounts 2014/15 - The main questions

Q. What’s happened to the value of the Fund?A. Now over £5bn, grew by 13.2%

Q. Has the fund maintained a positive cashflow?A. Yes, a small one.

Total value of the Pension Fund from 2009 to 2015

At 31 March

Value (£m)

Change (£)

Change (%)

2009 2,396 -552 -18.7%2010 3,238 842 +35.1%2011 3,558 320 +9.9%2012 3,777 219 +6.1%2013 4,341 564 +14.9%2014 4,536 195 +4.5%2015 5,137 601 +13.2%

Hampshire Pension Fund now £4,860m at 30 September 2015

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,500

£m

Fund income and expenditure 2014/15

* Includes £74.7m bulk transfer out ** Change in CIPFA guidance

£mContributions received 237 +6.5%Pensions paid -174 +4.5%Lump sums paid -43 +15.1%Net transfers in/out * -78Management costs ** -20Investment income (net of tax) 94 +4.8%Net Surplus 16 -83.1%







Movement in the cash surplus

2009/10 2010/11 2011/12 2012/13 2013/14 2014/150

10

20

30

40

50

60

70

£m


Investment Performance in

2014/15

The Fund’s investment managers

Global equitiesUK equitiesGlobal bondsUK index linked bondsAlternative investmentsPropertyPassive UK/Global equity

Investment Managers 31 March 2015

Asset Allocation by Portfolio 31 March 2015

Total Fund size £5,137m

Market returns in 2014/15

Total investment returns for the Fund

Any questions?

2014/15 Accounts and Fund Performance

Carolan DobsonIndependent Advisor to the Hampshire Pension Fund


Economic & Market Outlook

Investment Adviser and Trustee Services iAts

Economic and market outlook October 2015

31


Themes from last year

• Economic paths are diverging across the developed world• Interest rate policies are becoming different• Markets have to adjust to the US withdrawal from QE and a

move to normal levels of US interest rates• Risk is not priced properly• The Fed believes its role is to establish suitable macro economic

policies and encourage robust financial institutions, not smooth market performance

• Political uncertainty across Europe, rise of anti-Europe vote

32


• Sou

33

US


34

US


35

UK


36

UK


• EE

37

Eurozone


38

Eurozone


39

China


40

China


41


US Federal reserve Outlook

42


43


44

Joel DuckhamAon Hewitt


Funding Update

46

Aon Hewitt | Public Sector Consulting23 October 2015

Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority.

Hampshire County Council Pension Fund Annual Employers’ Meeting

Actuarial and Funding Update

Joel Duckham FIAAlison Murray FFA23 October 2015

47



Agenda

Funding update and outlook for 2016 valuation Other issues

– Scheme advisory board– Abolition of contracting-out – Cost management process

Employer considerations– Grouped funding framework– Employer policy

47

48



Funding update and outlook for 2016 valuation

49


Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. 49

Recap on 2013 valuation results

Whole of Fund funding ratio: 80.0% (Total Assets/Total Liabilities %)

4,327 956.3 4,661

4,340.6

Funding Target (£5,427.9M)

Assets (£4,340.6M)

Actives Deferreds Pensioners

1,998.6 2,473.0

Deficit (£1,087.3M)

50



2013 Valuation – contribution requirements

Average future service rate: 14.1% of pay

Deficit recovery contributions: 7.4% of pay Average Employer rate: 21.5% of

pay

In practice Scheduled body group: 13.1% of pay + monetary

amounts - £59.4M over 2015/16 *- * + 8.8% increase in April 2016,17,18,and 19. Then

3.9% p.a. increase in April 2020 through April 2035 Admitted body group: 15.6% of pay + monetary

amounts- £1.3M 2015/16 *- * + 20.0% increase in April 2016 and 17. Then

3.9% p.a. increase in April 2018 through April 2035 Ungrouped employers paying their own rates

50

51



Key assumptions

Discount rate / investment return: 5.5% p.a. Pension increases : 2.4% p.a. Pay increases: 3.9% p.a. Probability of funding success: 71%

Probability of Funding Success /

Risk

100%

Date

Fund

ing

ratio

(%)

31 Mar 2013

51

52



Progress since 31 March 2013

50%

60%

70%

80%

90%

100%31

/03/

13

30/0

6/13

30/0

9/13

31/1

2/13

31/0

3/14

30/0

6/14

30/0

9/14

31/1

2/14

31/0

3/15

30/0

6/15

Plan Ongoing Funding Ratio

52

53



Explanation of movement in funding position

80% 1%3% -8.0%

1%77%

50%

60%

70%

80%

90%

100%

Funding Level at 31 Mar 2013

Contribution and

Accruals

Asset Out-

performance

Financial Assumptions

Other Funding Level at 30 Jun 2015

53

54



Outlook for contributions

Employers currently paying c£61M p.a. in deficit contributions Approximate update to 30 June 2015 suggests further £15.3M p.a.

required over 22 year deficit recovery period, increasing at 3.6% p.a. (equivalent to c1.7% pay)

31 March 2013 30 June 2015

Employer future service rate 14.1% of pay 16.8% of pay

Past service surplus (shortfall) (£1,087.3M) (£1,547.5M)

Additional deficit contributions p.a. - £15.3M

54

Overall impact 4% - 5% pay

55



Market movements since 30 June 2015

On a “gilts+” basis, funding level fell 4% between 30 June 2015 and 30 Sept 2015

Our funding approach considers outlook for all asset classes in which you invest, not just gilts

55

Mar 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 150.0

1,000,000,000.0

2,000,000,000.0

3,000,000,000.0

4,000,000,000.0

5,000,000,000.0

6,000,000,000.0

7,000,000,000.0Liabilities Assets Deficit

56



Recent changes in mortality rates

2000 to 2011 saw strong reductions in mortality rates (i.e. leading to longer life expectancy)– Average (population) improvement rate was 2.4% p.a. over the period

2012 - 2014 improvements in mortality rates were much lower– Experience was flat in 2012 and 2013 (i.e. mortality rates were broadly unchanged from previous

years)– 2014 saw stronger improvements but nothing like enough to get back to the previous trend line

2015 to 31 July - high numbers of deaths compared to previous years, especially in the early months– Overall mortality rates 2.3% higher compared to same period in 2014– Partially due to higher than usual number of deaths from flu

Source: CMI Working Paper 83

Cum

ulat

ive

deat

hs

+30,000

+20,000

+10,000

0

-10,000

-20,0000 10 20 30 40 50

Week number

Cumulative reported deaths in E&W by week compared with the average over 2005 to 2014

2005 to 2014

2015

56

57



Outlook for 2016 valuation assumptions

How should recent experience affect mortality improvements assumption?

Will increase in mortality rates in 2015 prove to be a blip?

Is the slowing of improvements in mortality rates since 2011 a sign of a change in the previous trend?

Initial view:– Don’t currently expect to increase allowance for long-term mortality improvements in

2016 valuation– May be a slight reduction in allowance for improvements in the short-term

57

58



Effect of membership movements

Impact of austerity…– More early leavers than expected– Lower pay growth than assumed– Ageing membership?

Impact of auto enrolment…– Younger membership?

Take up of the 50:50 Scheme…– Lower than expected

58

59



Scheme Advisory Board

Deficit Management Recommendations- Standardised basis result- Transparency (past / future)- Minimum employer contributions- Targeting exit position

KPIs (Benchmarking exercise October 2015)- Risk Management- Funding level and contributions- Deficit recovery- Investment returns

59

60



The Fund’s relative position (published basis)

Hampshire position 2013 Hampshire position 2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

£bill

ions

Published Surplus/Deficit 2013 - LH Scale Published Funding Ratio 2013 - RH Scale

60

61



The Fund’s relative position (common basis)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

Surplus 2013 - single basis Published Surplus Funding Ratio 2013 - single basis

Hampshire position Hampshire position

61

£mill

ions

62



Wider considerations

GAD report under Section 13

(2) … employer contributions to be set at an appropriate level to ensure—(a) the solvency of the pension fund, and(b) the long-term cost-efficiency of the scheme.

(4) Where an actuarial valuation … has taken place, a person appointed by the responsible authority is to report on whether the following aims are achieved—

(a) the valuation is in accordance with the scheme regulations;(b) the valuation has been carried out in a way which is not inconsistent with other valuations under subsection (3);(c) the rate of employer contributions is set as specified in subsection (2).

(6) (a) … the report may recommend remedial steps

Review of Cipfa’s guidance on Funding Strategy Statements (end 2015)

Cost management process

62

63



Cost management process

HMT Cost Management Process

SAB Cost Management Process

HMT Directions 2014 LGPS Regulations 2014

Public Service Pensions Act 2013

Total cost cap – 19.5% of pay 1/3rd employee / 2/3rds employer Allowance for 50/50 option Unchanged commutation assumption

SAB may recommend changes if cost is above/below 19.5%

SAB must recommend changes if cost is 2% of pay above/below 19.5%

HMT process takes precedence

Employer cost cap – 14.6% HMT specified assumptions No allowance for 50/50 option Reduced commutation assumption

No action until 2% of pay collar breached

Consultation with SAB Default process if no agreement

63

64



Abolition of contracting-out

LGPS is “contracted-out” of the second state pension– Members and employers pay lower National Insurance contributions– Scheme must provide benefits above a prescribed level

Single tier state pension from April 2016

Contracting-out will be abolished– Employers will pay higher NICs – 3.4% (c2.3% of pay*)– Members will also pay higher NICs – 1.2% (c0.9% of pay*)– Private sector schemes may amend member benefits/contributions– Public service schemes will not be amended

* Estimate based on sample LGPS fund. Will be highly dependent on employee pay levels

64

65



Questions

66



Nick WeaverHead of Pensions, Investments and Borrowing


2014/15 Pension Administration

Update

5 key issues which need to be addressed for the LGPS

• Increasing complexity• Relentless reporting • Demands on resources• Maintaining systems & processes• Pressure on employers

Outside our control …

• Increasing complexity– LGPS addition of CARE – Tax rules getting even more tricky– Wider “promises” (and future potential issues)

• Relentless reporting – Scheme Advisory Board now up and running – Pension Regulator now (officially) involved– GAD extra demands, etc. etc.

What Pensions Services need to do …

• Demands on resources– Ensure we develop suitably skilled people– Prioritise the work – Provide accessible, clear information

• Maintaining systems & processes– Change of system is good for the future

(but been tougher than you would reasonably think!)– Processes need constant review

The Pressure on Employers …

• Austerity measures continue• Pensions are getting more complex• Less chance to “flex” deadlines

(e.g.2016 Valuation data demands & timetable)

• The basis for us working together is the “Administration Strategy” (which has been place for a few years.)

The Administration Strategy …

EOY Returns• With the CARE changes it has been more important

to get it right …than rush it.

• But next year it needs to be on time, for the 2016 Fund Valuation (and shorter ABS deadline)

Active membership

April 201 59% 13,227 24%May 57 17% 5,980 11%June 47 14% 30,955 56%July 37 11% 4,674 9%

342 100% 54,836 100%

Employers

Retirements (Days)

• Some employers are doing a great job !• Delays lead to complaints …. and interest payments !

<-20 -20 to -5 -5 to 0 0 to 5 5 to 10 10 to 20 20 to 40 40 to 60 60 to 90 90 +

197 176 83 50 32 60 37 5 11 12

30% 27% 13% 8% 5% 9% 6% 1% 2% 2%

30% 13% 21% 10%

Deferred Beneficiaries (Days)

• This delay impacts data quality (e.g. FRS17 & Valuation)• Lose touch with people before we know they left

…… which does not bode well for the future !

• We want to avoid fines … but will need to report this to the Panel & Board from 1 April

<-20 -20 to -5 -5 to 0 0 to 5 5 to 10 10 to 20 20 to 40 40 to 60 60 to 90 90 +

70 69 84 101 75 225 289 219 251 1350

3% 3% 3% 4% 3% 8% 11% 8% 9% 49%

15% 8% 11% 67%

How we support you …

– Employer meetings(e.g. Employer Focus Group, HAPOG)

– Employer training(Employer Days for new employers and staff, workshops on specific topics and End of Year training)

– On-line resources(Pensions Matters, Employer Guide, website)

For more information …

Please see:- Website www.hants.gov.uk/pensions- Pensions Matters

0r contact us on:- 01962 845588- [email protected]

Questions

Alison MurrayAon Hewitt


Employer Considerations

79



Employer considerations:Grouped funding framework

80



Grouping mechanism – what we said last year

303 employers with active members (as at 31 March 2014) 323 as at 31 March 2015

Two groups– Scheduled bodies group– Admission bodies group

Long-standing arrangement to– Smooth contributions– Share risks

Evolving to deal with emerging issues– Differential falls in payroll (LERP) – Outsourcings (particularly to closed employers)

Source for employer numbers: annual report and accounts

80

81



Progress to date – review of the groups

£4,602M

£231M£185M

£83M £19M£13M

Scheduled Body Group

Councils, Police, Fire & PO

Universities

Colleges

Schools

Resolution bodies

Other

Liabilities as at 31 March 2013£5,133M (95% of the Fund)

£28M £2M

£59M£44M

£20M

Admission Body Group

Universities

Transferee ABs

Housing Associa-tions

Community ABs

Independent Schools

Liabilities as at 31 March 2013£153M (3% of the Fund)

28 employers whose contributions are assessed individually

81

82



Recap on grouping mechanism

Experience is shared

-274

268

263

-18

155

-284

48

11

Interest on shortfall

Investment profit

Pay increase profit

Pension increase loss

Contributions paid towards the shortfall

Loss from change in financial assumptions

Profit from change in demographic assumptions

Membership movements and other items

£M

Source: 2013 valuation report

82

Whole of fund experience 2010-2013

83



Grouped contributions

Grouped employers pay “average future service rate”

Deficit contributions calculated based on share of group payroll

Layered Employer Recovery Plan– fixes deficit contributions to protect

against falling payroll

Grouping works well where participants are similar

83

84



Initial outcome of review of SBG

All scheduled bodies admit new members Generally publicly funded Some difference in profile e.g. schools/academies and colleges less

mature

Do all scheduled employers still “fit”?

Are they classified exclusively as public sector? Where does their funding come from? How committed are they to the LGPS? How financially secure are they?

– Greater focus on employer covenant (SAB, Cipfa guidance on FSS)

Actively considering HE/FE sector’s participation in SBG

84

85



Initial outcome of review of ABG

Greater variation between employers– Charities, other not-for-profit, commercial organisations – Some material difference in profile – e.g. employers not admitting new

members Scheduled body funding target not appropriate for those with a guarantor

or who can afford a gilts based exit valuation (if no subsuming body) Some employers asking to pay extra contributions

– Individual assessment gives greater control for employers and permits better targeting of funding position on exit

85

Actively considering housing associations and education sector employers’ participation in ABG

86



Current funding approach / strategy (in theory)

orphan FT scheduled body FT

Strength of funding target

Gilts FT

Stronger – less reliance on

investment returns

Weaker – more reliance on

investment returns

Exit valuations (orphan

liabilities)

Ongoing valuations (admission

bodies - orphan liabilities)

Ongoing scheduled body valuations. Ongoing and exit

valuations for admission bodies with subsumption

commitment

86

87



Gap between funding targets is material

Value of liabilities on different funding targets (as at 31 March 2013)

Difference varies according to employer’s membership profile

* % p.a. as at 31 March 2013

Subsumption Gilts (exit basis) Asset value

Discount Rate* 5.5% 3.2% n/a

Employer A (open) £5.43m £9.57m £4.29m

Employer B (closed) £10.86m £15.14m £8.90m

87

88



Proposal for employers removed from the groups

orphan FT scheduled body FTGilts FT intermediate funding target

Housing associations

Universities, Colleges,

Independent schools

Any changes to contributions need to be carefully managed

88

89



Practicalities and next steps

Removal from group requires notional allocation of assets to employers– Preferred approach is consistent with accounting and exit valuations

Best practice indicates transparency and consultation– Consultation 23 Oct – 20 Nov 2015– Invitation to workshops (Jan 2016) for affected employers– Revised FSS to be considered by the Panel (18 Dec 2015)– Contribution changes will be managed as appropriate– Further communications as part of 2016 valuation exercise

89

90



Questions

91



Employer considerations:Employer policy

92



What we promised last year - a road map for employers

Ensure the grouping mechanism evolves as required

Enhanced communication / greater transparency – Simple, principles-based admissions policy for

sharing with employers– Review template admissions agreements

(update for 2014 scheme)– Simple principles-based exit policy (standalone

or within admissions policy / FSS) for publication

Pre-planning for the 2016 valuation

92

Aim: Clearer, more consistent communication with employers on actuarial issues

92

93



Employers in the Fund

Employer Type 31 March 2013 31 March 2015

Scheduled 120 164

Resolution 51 58

Admitted 97 101

Total 268 323

Source: 2013 valuation and 2014/15 Annual report and accounts

Net increase in admitted bodies allows for a number of exits More admissions in the pipeline

93

94



Key elements of employer policy

Covers admissions and exits

Framework within which administering authority operates– principles-based– linked to funding strategy statement– ensures consistency– identifies different types of employer– focus on managing risk– helpful for administering authority and employers alike

94

95



Employer Policy

95

Why are admission bodies in the SBG? Response to new approaches by

letting authorities “Pass through” arrangements

where risk remains with letting authority

Why does this matter? Grouping arrangements mean

risks are shared Adjustments required where

closed employers join Complex and costly unless a

pragmatic approach taken

£4,602M

£231M£185M

£83M £19M£13M

Scheduled Body Group

Councils, Police, Fire & PO

Universities

Colleges

Schools

Resolution bodies

Other

PO is “protected outsourcings”Actuarial speak for admission

bodies

96



Employer policy

Existing arrangements remain in place– Power to remove employers from the groups – Power to adopt a intermediate funding target– Focus on protecting other employers

New employers– Admission bodies and wholly owned companies – stand

alone employers (individual contribution rate)– Transferor employer’s contributions may be amended– Town and parish councils – join SBG– New academies – join SBG– Bonds / guarantors will be required where appropriate

Default approach– Closed admission agreement– Subsumption commitment from letting authority– New admission – fully funded

97



Employer policy (exits)

Confirms regulatory position*, i.e. exit valuation will be carried out when employer– Ceases to be a Scheme employer– No longer has any active members

Little regulatory flexibility

Funding Strategy Statement sets out how liabilities on exit are calculated

* See Regulation 64 of the LGPS Regulations 2013

98



Next steps

Draft Policy will be circulated for consultation Consultation ends 20 November 2015 Policy will be considered by the Panel on 18 December Final policy will be published on Fund website Subject to regular reviews (at least triennially)

98

99



Questions

100


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Documents

Hampshire Pension Fund Annual Employers Meeting 23 October 2015