West Sussex County Council Pension Fund · 25 April 2016 Approach to Employer Risk Profiling &...

Hymans Robertson LLP is authorised and regulated by the Financial Conduct

Authority

West Sussex County Council

Pension Fund

Steven Law FFA

Kameel Kapitan

25 April 2016

Approach to Employer Risk Profiling & Management

Ag

end

a Item N

o. 9

2

Formal valuation of the Fund

The valuation is really c180 employer valuations

Employer

Employer

Employer

Employer

Employer

Employer

Employer

Employer

Employer

Employer

Employer

3

Factors we consider for managing employers

Covenant

term

Open or

closed

Guarantor?

Maturity covenant

Close to

exit?

Funding

source

Security

How strong

is the

covenant?

How strong

is the

guarantee

or security?

Type

Security of

funding?

4

Case studies

Employer Type Funding

Source

Security Open/

Closed

Guarantor Close to

cessation

Admission Body 1 Admitted

Body

Social

Housing

None Closed No No

Admission Body 2 Admitted

Body

Council

contract price

Bond? Closed District

Council

Yes

Council Scheduled

Body

Tax raising Tax-raising

body

Open Central

Government

N/A

Academy Scheduled

Body

Central

Government

Government

backed?

Open Central

Government

N/A

Maturity and Covenant are also considered – but are not used

in initial categorisation

5

In practice - employer categorisation

Scheduled Bodies Admitted Bodies

Tax raising

or Police

Non-tax

raisingSecurity No security

Council

TaxPrecept

Gov

GuaranteeNo gov

GuaranteeOpen Closed Open Closed

Low RiskMedium

RiskHigh Risk

6

2016 valuation: setting employer funding

strategies

What is the employer’s funding target?

How long do we want to give the employer to get to the target?

How sure do we want to be that the employer hits the target?

7

Close to exit, security

Type, open/closed, time to exit, maturity

Funding source, security, covenant, maturity

2016 valuation: setting employer funding

strategies

8

Assigning funding plans

Scheduled Bodies Admitted Bodies

Tax raising

or Police

Non-tax

raisingSecurity No security

Council

TaxPrecept

Gov

GuaranteeNo gov

GuaranteeOpen Closed Open Closed

Stabilised20yrs –

66%

20 yrs –

75%

FWL –

75%

FWL –

75%Flight-path

FWL –

75%Cessation

Low RiskMedium

RiskHigh Risk

9

Case studies

Employer Employers Funding Target Time Horizon Probability of hitting

target

Admission Body 1 100% on Gilts Basis Future Working

Lifetime

75%+

Admission Body 2 “flightpath” Remaining

Contract Period

“flightpath”

Council 100% on Ongoing Basis 20 years 66%

Academy 100% on Ongoing Basis 20 years 75%

Pragmatism and flexibility are still desirable though…

10

Other steps taken by the Fund

Require bonds or guarantees where appropriate

Review bond amounts regularly

Annually for larger employers

At each valuation for other employers

Consider alternative forms of guarantee

Clear & well documented policies

Managing exits

Transferring risks where appropriate

11

Upcoming challenges

Charity sector funding

College status changes

College mergers

Academy conversion rates

Academy outsourcings

Outside scrutiny

Risk of separation of Fund and Council

Decoupling of investment and funding for high

risk employers

Outlook for 2016 valuation

13

Crystal ball….

Funding levels will have improved for most employers

14

Crystal ball….

But deficits may have grown…

15

Effect of RPI/CPI gap increase….

Estimated 31 March 2016 position

0.8% Gap 1.0% Gap

16

Outlook for rates

Increases likely for a majority of employers

Cost of future benefits accruing has gone up (e.g. the

Primary Contribution Rate)

Potential improvements in funding may not be enough

to offset through lower Secondary Rates

Any questions?

Thank you