Hampshire Pension Fund: Employer Workshop for Admission ... · ABG = 20.5% of pay(1) (2) Likely to be very variable for individual ... Updated to allow for known/expected employers

Prepared by Alison Murray FFA, Joel Duckham FIA

Presentation to Hampshire Pension Fund

Hampshire Pension Fund:Employer Workshop for Admission Body Group

28 May 2019

2Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority.

Agenda

Introduction

Current funding arrangements

Review of the groups

Questions

Introduction


Purpose of this session

Formal consultation on principles of dismantling the Scheduled Body Group / reforming the

Admission Body Group with affected employers

Outcome of Panel & Board decision will be advised to employers

Your

opportunity

to ask

questions

Letters and briefing note sent 30 April

Employer meetings 28/29 May

Formal responses due from employers by 26 June 2019

Report to be considered by Panel and Board in July


High level proposals

Changes to take effect from 31 March 2019

Dismantle the Scheduled Body Group (SBG)

Set up a smaller group for academies (Academy Pool)

Set up a smaller group for Town and Parish Councils

All other employers in the SBG to be funded individually

Admission Body Group to be retained and reformed

Improved

funding

position at

the 2019

valuation

provides an

opportunity

for reform

without

increasing

contributions


Key funding objectives

Stability and affordability of

employer contributions

Prudent, longer-term

approach to funding

Appropriate for employers

▪ Considers employer risk

and circumstances

▪ Responsive to employer

needs and changing

context

Expectations of 2019 valuation is for stable (possibly lower) contributions


What influences employer contributions?

▪ Affects funding position (assets / liabilities)

▪ Generally shared across employers (single investment strategy)Investment returns

▪ Affects funding position and future service rate

▪ Effect varies according to employer/group membership

Outlook for future

returns and CPI

▪ Affects funding position (assets / liabilities)


Pay and pensions

increases

▪ Affects funding position and future service rate (assumptions only)


Demographic

experience and

assumptions

Funding strategy is a key determinant (funding target, recovery period etc)


£34.95 M

£11.89 M

Subsumptioncommitment

No Subsumptioncommitment

£5097.4 M

£24.3 M

£306.7 M £131.2 M

County, District,City Councils andother

Town and ParishCouncils

Police and Fire

Academies

Existing HCC grouping arrangements

Liabilities: £5,560M Assets: £4,492M Liabilities: £47M Assets: £38M

Figures in pie charts are liability values as at 31 March 2016

Scheduled Body Group Admission Body Group

Number of employers

TPCs 60

P&F 3

Academies 93

Councils + other 22

Number of employers

Subsumption agreement 19

No subsumption

agreement

4

Numbers in tables are as at 31 March 2019

Current funding arrangements


Funding position as at 2016 valuation

Whole of Fund funding ratio: 80.8% (Total Assets/Total Liabilities %)

£1.068 bn

£5.56 bn

£4.492 bn

£0.009 bn

£0.047 bn

£0.038 bn

£0.16 bn

£0.843 bn

£0.683 bn

0 1 2 3 4 5 6 7

Deficit

Liabilities

Assets

Whole of fund position as at 31 March 2016

Scheduled Body Group Admission Body Group Other


Existing group funding arrangements

Current arrangements Comments

Future Service (“primary”)

Rate

Average across all the group’s

membership

SBG = 16.9% of pay(1)

ABG = 20.5% of pay(1) (2)

Likely to be very variable for individual

employers in the Admission Body

Group due to small membership

Asset / Deficit tracking Group level, no allocation to individual

employers for funding purposes

Risk sharing helps smooth experience,

particularly for small employers

Deficit (“secondary”)

contributions

Based on a share of the Group’s

shortfall (in proportion to pay (3))

Implicitly assumes all employers likely

to remain in the Fund indefinitely, not

the case for closed employers

Strain contributions Paid in addition Important for employers to pay the

cost of their own decisions on

redundancy/efficiency early

retirements

Notes

(1) Assumes all employers are open (i.e. admit new members to the Fund).

(2) Updated to allow for known/expected employers leaving since 2016

(3) Layered Employer Recovery Plan fixes deficit contributions to protect against falling payroll

Some risks relating to death and ill health benefits shared at Fund level


Arrangements for deficit recovery and phasing contribution rates

Scheduled

body

group

Admitted

body

group

Primary

(% pay)

Secondary

(£ p.a.)

2017/18 14.1% £X p.a. (employer-specific)

2018/19 15.1% 8.8% increase

2019/20 16.1% 8.8% increase

2020/21+ 16.9% 3.9% increase p.a. until 31

March 2036

Primary

(% pay)

Secondary

(£ p.a.)

2017/18 16.6% £X p.a. (employer-specific)

2018/19 17.6% 3.9% increase

2019/20 18.6% 3.9% increase

2020/21+ 20.5% 3.9% increase p.a. until

31 March 2036

Deficit contributions increase p.a. over recovery plan


2016 changes to the groups

Scheduled

Body Group

Admission

Body Group

Universities Independent

schools

Universities and colleges removed from the

Group (not taxpayer-backed)

Removed from the Group (not

charitable organisations for which the

admission body group was intended)

Objective to ensure risk-sharing limited to “similar” organisations

Review of the groups


Why review the groups (again)

Scheduled Body Group

Market conditions

Admission Body Group

Employers

asking to

pre-pay

deficit

contributions

Not all

resolution

bodies

permanent in

the Fund

Government

reviewing

academy

participation

Increasing

need to

control/

understand

pension

costs

Material

differences

in potential

term to exit

Not all

employers

have a

subsumption

commitment

Funding

level has

materially

improved

since 2016

Increasing

changes to

service

delivery

models

Whole of Fund grouping / pooling now very uncommon in LGPS


Objectives of the proposed changes

Promote good governance in the Hampshire Pension Fund

- better management of employer risks

- operate grouping where there is a clear rationale for doing do

Facilitate increased diversity of employer workforce management policies

- diversity of approach/membership difficult to accommodate in grouped environment

- cross-subsidies from employer behaviour less easy to justify

Allow employers greater transparency over their pension costs

- Flexibility on payment of deficit contributions

Overriding objectives to balance interests of all employers


Why now?

Source: Aon Hewitt, estimated for Hampshire Pension Fund, Fund as a whole (i.e. not just SBG)

Funding position now much closer to 100%

Expected

returns from

31/319

2016/19

Member-

ship

experience

Mortality

and demo-

graphic

assumptions

Investment

strategy

changes

2018 approximate update - no allowance for:

Funding level

80.8% - 31 March 2016

93.5% - 31 Dec 2018

Deficit contributions

£1.24BN - 31 March 2016

£464M - 31 Dec 2018

Future service rate

17.1% - 31 March 2016

16.7% - 31 Dec 2018

Total service rate

24.6% - 31 March 2016

19.5% - 31 Dec 2018

Changes to

funding

strategy

“prudence”


Why now?

Many employers in the ABG have closed

Ongoing funding is not currently aligned with exit liabilities

Target

amount‘debt’ (and hence deficit payment) on exit may

be higher than the deficit contributions currently

being paid as an ‘ongoing’ employer

Target

dateOngoing deficit contributions currently payable

to 31 March 2036 but many ABG employers

expected to exit before then

Current group

funding rules

work best for

similar

employers who

are open and

not expected to

exit the Fund

Currently we

are unable to

‘plan’ for exit

Subsumption commitment aligns exit and ongoing funding position


Target amount - example

Target

amount

Current deficit

payments set in

line with 2010

payroll

Exit ‘debt’ is

based on share of

Group’s liabilities

▪ 2 employers in a group, both with the same payroll in 2010

▪ Group deficit contributions £100 p.a. over 19 years

▪ Employer 2 has a greater share of the Group’s liabilities (60%)

Example

Ongoing contributions % of 2010 payroll Deficit payments

Employer 1 50% £50 p.a. over 19 years = £950

Employer 2 50% £50 p.a. over 19 years = £950

Exit ‘debt’ if leave now % of liabilities Exit debt

Employer 1 40% £760

Employer 2 60% £1,140

Ongoing contributions should target exit liabilities

Employer deficit

contributions

not targeting

exit position

leading to risk

of ‘surprises’ at

exit and risk to

the Fund if

unable to pay

exit debt at the

time


Target date - example

Target

date

0

5

10

15

Less than 5years

5 to 10 years Over 10 years

Future working lifetime

Number of Employers in ABG

Example Deficit Time until exit Amount outstanding at Exit date if

use 19 year recovery period)(1)

Employer 1 £10,000 5 years £7,400

Employer 2 £10,000 10 years £4,700

Employer 3 £10,000 19 years £0

19 years for deficit recovery is too long for most

Exit valuation

carried out

when last active

member leaves

Ideally ongoing

funding will pay

off any deficit

by expected

exit date


If deficit is nil there is no step change

Proposal for reform (i.e. allocating the group deficit)

▪ Allocate deficit in proportion to each employer’s funding target (liabilities)

– consistent with deficit on exit / consistent with accounting for pensions

– aligns with factors influencing deficit (e.g. member experience)

– same as approach taken when employers exited group arrangements in 2016

Currently deficit payments

based on 2010 payroll

Deficit payments may change

(based on liabilities, not payroll)

Liabilities – based on employer’s membership and funding assumptions

No change in method / assumptions for those with subsumption commitment

Assets – based on ABG funding position

ABG FL 80% = Employer FL = 80%; ABG FL 95% = Employer FL = 95%

Employers whose

liabilities will not be

subsumed will leave the

Group on 1 April 2019


Updated example – impact on deficit contributions

Individual outcomes will vary

% of 2019 liabilities NEW deficit payments*

Employer 1 40% £18 p.a.


% of 2010 payroll Deficit payments p.a.



▪ 2 employers in a group, both with the same payroll in 2010

▪ Funding position improved from 80% to 95%

▪ Recovery period reduced from 19 years (2016 valuation) to 10 years (2019)

▪ Group deficit reduced by 75% (i.e. 80% funding level to 95% funding level)

* Total deficit contributions reduced to £45 p.a. in 2019 valuation

Current deficit payments (80% funded / 19 year recovery period in 2016)

Deficit payments under new arrangements (95% funded / 10 year recovery period in 2019)

More detailed

example later

Deficit payments required of £100 p.a. in total


Recap - Possible approach in 2019 (admission body group)

▪ i.e. increase “probability of

funding success” (PoFS)

▪ Restore to 2007 level of

prudence

Reduce

funding risk

Reduce

investment

risk

▪ i.e. lower return, lower volatility

investment strategy

▪ Retain current allocation to

gilts

Positive results will provide an opportunity to refine approach

Reduce risk Anticipate future ageing

Average Age

Primary Rate (% Pay)

▪ Primary Rate increases as average age

increases

▪ Expect increase in average age [from A to B]

▪ Consider moving from ‘Open’ rate to ‘Closed’

rate

2016 (open rate)

2019 (closed rate)

Stable rate overpay

Stable rate underpay

A B


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Future Service Rate (open*)

Other considerations – future service (“primary”) rate

Average is

20.5% of pay

ABG future service rate 20.5% (actual % of pay being stepped)

Source: 2016 valuation based on Admission Bodies with active members as at 31 March 2019

% of pay

Each dot represents an admission body

Key variable is average age of active members

After removal

of those

without

subsumption

commitment

and others

known to

have exited(*closed rates will be slightly higher)


Proposals to retain pooling for Admission Body Group

Size / volatility

Consistency

Administration

But need ability to manage route to exit

▪ Desirable to retain common rates for employers subject

to common funding pressures

▪ Avoid significant one-off change to future service rates

▪ Administratively simpler?

▪ Small employers more likely to experience volatile

pension costs and less likely to be able to absorb

changesLess

justification for

moving ABs

onto

individually

assessed

contributions


-1,239

130

54

-697

173

136

94

147

-189

-1,087

-1,400 -1,200 -1,000 -800 -600 -400 -200 0 200 400

Deficit at 2016 valuation

Other, including membership movements

Profit from change in demographic assumptions

Loss from change in financial assumptions

Contribution profit

Pension increase profit

Salary increase profit

Investment profit

Interest on shortfall

Deficit at 2013 valuation

£M

Funding risks are shared within a pool/group

Source: 2016 valuation report for Hampshire Pension Fund

Whole of fund experience 2013-2016

Risks are shared within the ABG (i.e. there are cross-subsidies)


Other items pooled at Fund-level

Intention is to retain benefits of pooling but better target exit position

▪ Lump sum death in service benefit

– payment of 3 x Pensionable Pay on death

– ‘premium’ is included within contribution rates

▪ Ill health early retirement (from 1 April 2016)

– enhanced pension, without reduction (this can be expensive if the member is young)

– assets adjusted so all employers assumed to have whole Fund “average” experience

▪ Partner’s pension on death in service (from 1 April 2016)

– enhanced pension (can be expensive if the partner is much younger than the member)

– assets adjusted so all employers assumed to have whole Fund “average” experience

All other funding risks are shared within the Admission Body Group


* Asset shares tracked at employer-level to facilitate flexibility

Proposals – Admission Body Group

Currently 23 Admission Bodies (19 with subsumption commitment / 4 without)

Assets allocated to employers calculated as:

Similarities to current ABG Differences to current ABG

▪ Common future service rate ▪ … remove 4 employers without subsumption commitment

▪ Share all risks

(except employer discretion costs / risks

shared at whole of Fund level)

▪ … but risks will be shared more fairly:

- ABG currently shares risks in proportion to payroll

- Reformed ABG will share risks in proportion to assets / liabilities

▪ Tailored recovery periods for deficits / surpluses depending on

expected future participation *

Funding Target of Admission Body at 31 March 19 x Funding Ratio of ABG at 31 March 19


Results in the 2019 valuation could be materially different to those shown.

Example – Notes

▪ Examples on the following slides illustrate the factors we expect to influence the valuation result

for an employer in the Admission Body Group, including the impact of the proposed reforms

▪ Figures are for illustration only, based on 2016 valuation data and results as at 31 March 2016

▪ Figures have been calibrated based on an employer with payroll of £50,000 and paying deficit

contributions of £8,000 p.a. (over 2019/2020)

▪ Figures do not allow for actual changes in membership / financial conditions / demographic

assumptions since 31 March 2016

▪ Figures no not allow for ‘other’ unknowns, such as the impact of the McCloud judgement and the

outcome of the Cost Management process, which could lead to higher contributions


Example outcome 1 – employer currently under-paying against exit debt

Notes:

(1) Increase in primary rate in 2020/21 due to stepping in 2016 valuation + impact of employers exiting the group

(2) Use of attained age actuarial method which anticipates future ageing of membership in a closed scheme

(3) Change of allocation of deficit contributions to liability-based

(4) Scenario for increased prudence assumes lower future investment returns - reduction in funding level to 90% and increase in primary rate

(5) Deficit contributions assumed to increase at 3.6% p.a. after 2020/21

Primary

(future service rate)Deficit conts £'000 Total (£ p.a.)

Effect on total

contributions

Current rate (19/20) 18.6% 8.0 17.3

Expected rate (20/21)

(2016 valuation) (1) 20.5% 8.3 18.6

If: assume closed

scheme(2) 21.9% 8.3 19.3

If: improved funding level

(to 95%)21.9% 2.3(5) 13.3 -28% (13.3 cf 18.6)

If: Reform ABG (change

deficit allocation)(3) 21.9% 3.2 14.2

If: increase prudence

(whole of Fund decision)(4) 23.1% 6.3 17.9-4% (17.9 cf 18.6)

Contributions will be lower if payroll has fallen. Still doesn’t target exit position

Payroll assumed to be

unchanged in 20/21


If: reduce recovery period

to AFWL (6.1 yrs)(5) 23.1% 16.3 27.9 +50% (27.9 cf 18.6)

Example outcome 1 – in theory

Primary


Effect on total

contributions

Current rate (19/20) 18.6% 8.0 17.3


(2016 valuation) (1) 20.5% 8.3 18.6


(whole of Fund decision)(4) 23.1% 6.3 17.9-4% (17.9 cf 18.6)

£100K deficit on exit would have been payable regardless of grouping changes

….. (see previous slide)

Contributions certified will be no less than expected 2020/21 monetary amounts

2019 exit deficit will be provided as context (here c£100k)

Contributions will be set taking account of affordability and stability.

No intention to certify increases unless affordable


Example outcome 2 – employer currently over-paying against exit debt

Notes – as per slide 30

Primary


Effect on total

contributions

Current rate (19/20) 18.6% 8.0 17.3


(2016 valuation) (1) 20.5% 8.3 18.6

If: assume closed

scheme(2) 21.9% 8.3 19.3

If: improved funding level

(to 95%)21.9% 2.3 13.3 -28% (13.3 cf 18.6)

If: Reform ABG (change

deficit allocation)(3) 21.9% 1.0 12.0


(whole of Fund decision)(4) 23.1% 2.0 13.6 -27% (13.6 cf 18.6)

If: reduce recovery period

to AFWL (8.7 yrs)(5) 23.1% 3.7 15.3 -18% (15.3 cf 18.6)

Deficit on exit is c£30K – contribution reductions justifiable


Observations from examples

Contribution increases will be carefully managed

Improved funding position helps support changes which will improve the governance of the ABG

Reduction in recovery period is potentially significant for some employers

Decision yet to be taken on increase in prudence in 2019 (another potentially significant factor)

Individual employer outcomes will be different depending on circumstances

Exit position is the key driver of contributions – NOT affected by grouping changes


Recap - Exit Planning

Employer still needs to pay exit debt Based on ‘scheduled body’ funding target

Indicative exit figuresWill be provided with the 2019 valuation results

Is now a good time to get out? Not providing advice, but exit debt has now reduced considerably (relevant to employers who want to leave but until

now have felt trapped in the Scheme).

Interim updates Ask Administering Authority for interim updates if required (at your cost)

Avoid accidental closureIf this would cause cashflow issues. Several employers only have 1 active left


Conclusion

Proposal to reform ABG appropriate given improvement in Funding Level and subsumption

commitments now in place

Theoretical contributions could be higher or lower - any increases will be managed

▪ 2019 valuation not yet complete (calculations have not yet started) and final outcome is uncertain:

McCloud – GAD has quoted liability increase of + 0.5% to +1.0%

Cost cap – paused but SAB recommended changes worth 0.9% of payroll

Membership movements including pay experience – TBC!

Funding strategy (expected returns / increase prudence)

Slow down in mortality improvements improves funding level and reduces cost of benefits

Objective is better targeting of exit position within affordability constraints

Summary of proposals


Recap on proposals

Disband the Scheduled Body Group

Remove selected employers from ABG1

Assets to be allocated on a "share of fund"

basis (same as FRS accounting / exit

valuations)

2

Employers currently in SBG, and those

staying in ABG, expected to have same

funding target at 2019 valuation

3

Orphan funding target to be adopted for

employers being removed from ABG (no

subsumption commitment)4

Contribution increases to be phased in

gradually, where appropriate/needed5

New group/pools to be established for

academies and TPCs6

Individual deficit recovery periods and

deficit contributions for new TPC

group/pool and ABG

7

Death-in-service and ill-health risks

continue to be shared across the whole

Fund

8


Next steps

Best practice requires

transparency and

consultation

Proposals and feedback

considered by Panel

and Board in July

If proposals accepted

New grouping

arrangements reflected

in 2019 valuation

Initial valuation results

available October -

December

Consultation on FSS to

run from 18 October

New contributions

effective 1 April 2020

Consulting now to

ensure no delay in

valuation results

Opportunity to feedback

on other elements of

strategy

Note consultation on

valuation cycle

Questions?


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Registered in England & Wales No. 4396810

To protect the confidential and proprietary information included in this material, it may not be disclosed or

provided to any third parties without the prior written consent of Aon Hewitt Limited. This presentation may be

shared with employers in the Hampshire Pension Fund subject to the conditions listed below. However, this

document does not constitute advice to any employers in the Fund, nor does Aon accept any duty of care to any

party other than Hampshire County Council as our client in relation to this document.

The conditions are as follows:

▪ Employers acknowledge and agree that Aon Hewitt Limited is not providing advice to them and that Aon

Hewitt Ltd does not have any responsibility towards any employers relying on this material.

▪ Employers accept that all asset and liability figures in this presentation are approximate and/or illustrative

and should not be used to make any decisions relating to funding or investment strategy nor future

participation in the Fund/LGPS

▪ Employers agree that they will not distribute or otherwise communicate any part of the information to any

other party without prior written consent of Aon Hewitt Ltd

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

Documents

Hampshire Pension Fund: Employer Workshop for Admission ... · ABG = 20.5% of pay(1) (2) Likely to be very variable for individual ... Updated to allow for known/expected employers