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London Pensions Fund Authority. 2013 Actuarial Valuation. [email protected] [email protected]. November 2013. Agenda. Purpose of valuations. Triennial Funding Valuation. How do we do it?. Total Cashflows - £17bn. How do we do it?. Assumptions. Open employers. - PowerPoint PPT Presentation
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UK Actuarial Advisory Firm of the Year
London Pensions Fund Authority
2013 Actuarial Valuation
[email protected]@bwllp.co.uk
November 2013
AgendaPurpose of the valuation
How do we do it?
Assumptions
Results
Next Steps
Managing Deficits
Questions
2
Purpose of valuations
• Many questions!
Approach depends on
question being asked
• How much does each employer 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)
3
Triennial Funding Valuation• to certify levels of employer contributions to
secure the solvency of the FundSet 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• Essentially a collection of over 150 funds
Adopt different approaches for different
employer types
4
£0m£50m£100m£150m£200m£250m£300m£350m£400m£450m£500m
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96Year
Fund Cashflows (past service only)Actives
Deferreds
Pensioners
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”
5
Total Cashflows - £17bn
How do we do it?
Calculations completed at individual employer level
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
Recovery plan to fund any deficit
6
Assumptions
7
Price Inflation (RPI)• Use Bank of England Inflation Curve• Adjust for CPI
Salary Increases• Initially inflation increasing to CPI plus 1.8%
Discount rates• Funding : Employer-specific risk-adjusted expected investment
return• Accounting: Bond yield curve
Statistical assumptions• Pre retirement : GAD assumptions• Post retirement: Club Vita with CMI 2012 (min 1.5%) improvement
Open employers
8
Open employers are assumed to carry on indefinitely in the
Fund (as currently)
Employers are assessed based on strength of
covenant
Strength of covenant then determines the risk allowance
in the discount rate
Closed employersNo more active members joining means that employers’ leaving dates can be estimated
Cessation debt payable on exit is often substantial
Can modify the funding target to plan for this
• the “projected cessation” approach
Discount rate before leaving is calculated in the same way as for open employers
9
Closed employers
Summary of Financial AssumptionsAssumption Value
CPI inflation 2.7%
Pay increases Long term CPI plus 1.8%
Short term CPI
Discount rates
Ongoing 5.9%
Employer contributions while participating in the Fund
4.5% to 5.9%
Cessation 3.1%
11
Sensitivity of assumptions• Central assumptions
£0m£50m£100m£150m£200m£250m£300m£350m£400m£450m£500m
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96Year
Fund Cashflows (past service only)Actives
Deferreds
Pensioners£17bn£17bn
12
£17bn
Sensitivity of assumptions• What if inflation is 0.5% higher?
£0m£50m
£100m£150m£200m£250m£300m£350m£400m£450m£500m
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96Year
Fund Cashflows (past service only)Actives
Deferreds
Pensioners£20bn
13
£20bn
Sensitivity of assumptions• And what if people live for longer as well?
• 2.5% long-term improvement instead of 1.5%
£0m£50m£100m£150m£200m£250m£300m£350m£400m£450m£500m
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96Year
Fund Cashflows (past service only)Actives
Deferreds
Pensioners£23bn
14
£23bn
Employers’ Contributions
15
• Percentage of salaries for new benefits• Between 14% and 40%
Accrual of new benefits
• Cash amounts, paid over either average time to leaving or 17 years
• Funding levels between 50% and fully funded
To pay for past service deficit
• Closed employers only• Combination of percentage of salaries and cash
amounts, paid over average time to leaving• Can be significant if mature active membership
To contribute towards expected
cessation amount
Next Steps
Individual employer
results
Communication and
discussion of results
Final report
16
Managing Your Deficit
17
Funding Strategy• Open employers with a strong covenant - 17 year recovery period• Mature closed employers may have very short recovery period
Reduce perceived risk to the Fund?• One-off contribution?• Guarantees from Government or parent organisations?• Security or escrow account?
Reduce recovery period if affordable• Buffer for adverse experience• Lower pension costs in longer term
More now means less later• If assumptions borne out in practice
20 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £185m
18
10 Year Recovery Period - £100m of deficit
Total Deficit Contributions - £140m
19
Any questions?
20
