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Suffolk County Council Pension Fund. Employer Forum. Jamie Clark 25 July 2012. Today’s discussion. Funding update Where are we now? Look ahead to 2013 valuation LGPS reforms New scheme design Financial impact of reforms LGPS participation Opt-outs Auto-enrolment. Funding update. - PowerPoint PPT Presentation
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Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
Suffolk County Council Pension Fund
Employer Forum
• Jamie Clark
• 25 July 2012
2
Today’s discussion
Funding update
Where are we now?
Look ahead to 2013 valuation
LGPS reforms
New scheme design
Financial impact of reforms
LGPS participation
Opt-outs
Auto-enrolment
Funding update
4
Actuarial valuation
Funding position
Liabilities
Assets
Funding level (100% = “fully funded”)
Contribution rate
Future Service Rate (benefits earned in future)
Deficit contribution (benefits earned in past)
Formal valuation every 3 years – next one due 2013
5
2010 valuation position
This is whole fund – individual employer positions vary
Past Service Position (£m)Past Service Liabilities 1721Market Value of Assets 1415Surplus / (Deficit) (306)
Funding Level 82%
Contribution Rates (% of pay)Future Service Rate 16.6%Past Service Adjustment (20 year spread) 5.6%Total (Common) Contribution Rate 22.3%
6
Key factors that influence the valuation
Market conditions
Life expectancy
Contributions in / benefits out
Salary increases
Membership profile
Changes to the scheme
Full picture will emerge at 2013 valuation
7
Market movements since 2010
8
Effect of market movements since 2010
Expected Actual Expected Actual
Assets Liabilities
Adverse markets = a double whammy for the Fund
9
Funding level (whole fund)
82%
71%
45%
55%
65%
75%
85%
95%
31 March 2010 31 March 2012
(£306m)
March 2010 June 2012
82%
Fun
ding
Lev
el
71%
(£668m)
10
Outlook for 2013
Compared to 2010 valuation:
Funding levels likely to be lower
Deficits likely to be bigger
(Theoretical) contribution rates likely to be higher
Results will vary between employers
Today’s update an estimate….full picture in 2013
11
What’s in the mix for 2013 valuation?
Suffolk 2013 valuation
LGPS reform
13
Hutton’s main recommendations
Keep “Defined Benefits”
Protect accrued rights
New CARE scheme for future accrual
Revalue in line with earnings
Link NRA to SPA
Fixed cost ceiling
Government set “reference scheme”
14
New LGPS from 2014
Existing Scheme Proposed New Scheme
Benefit Type Final Salary CARE with CPI revaluation
Accrual Rate 1/60th 1/49th
Retirement Age 65 State Pension Age
Member Contribution Rate
Average 6.5%Full-time equiv. pay
Average 6.5%Actual pay
Accrued rights protected (NRA, Rule of 85, final salary link)
Protection for members within 10yrs of NRA at 1 April 2012
New “50/50” option to bolster LGPS participation
15
Financial impact on LGPS employers
Taken in isolation...
No impact on existing deficits (past service)Accrued rights to 2014 are protected
Modest savings on new benefits (future service)c1.5%-2% of pay across whole fund
Savings will vary by employer:Depends on membership profile
Changes to member contributions
Take up of “50/50” option
BUT cannot take in isolation!
16
Impact on members
No change to accrued rights
Protection for members within 10yrs of NRA at 1 April 2012
All pension taken at same retirement age
CARE more/less favourable to certain members
Higher accrual rate (1/49th) / lower revaluation rate
Bakes in more guarantee
Favours those closer to retirement
Better in some economic circumstances
There will be winners and losers
17
What still lies ahead...
Consultation on new scheme
New scheme details to be thrashed out:Cost management mechanism (cap and collar)
Hutton governance recommendations
Implementation / administration
Communication with members
.....all within a very challenging timescale!
LGPS participation
19
Potential impact of LGPS opt-outs
Issues for any member opting out:
Less security, greater State dependency
Lose employer contributions and other benefits
Issues for the pension fund:
Possible threat to sustainability in long term
Possible cashflow / investment issues in short term
What will help reduce LGPS opt-outs?
New scheme “50/50” option
Communication: members understanding value of their pensions
20
Auto-enrolment – what is it?
Encouraging greater pension provision
Auto-enrol members into a “qualifying scheme”
LGPS is a qualifying scheme
Minimum contribution levels
Various key “staging dates”
Policeman is The Pensions Regulator
Responsibility lies with employers
21
Auto-Enrolment (simplified!) New starts
Opt-outs
Suffolk LGPS
Existing
A/E
A/E
22
Implementing Auto-Enrolment
Staging datesEligible
jobholders
MonitoringCommunications
Contributions HR/Payroll Penalties
Early planning essential!
23
Summary
Funding update
Likely outlook - higher deficits and contribution rates....
....but won’t know full picture until 2013 valuation
LGPS reform
New scheme from 2014
No impact on current deficits
Unlikely to mean lower contribution rates at 2013
LGPS participation
Opt-outs in no-one’s interests
Auto-enrolment on the horizon – employer responsible
Early planning for A/E is vital
Thank you
Any questions?
Appendix
26
How CARE works
For example, Tom earns £20,000,
so his pension in year 1 is worked out as:£20,000 x 1/49th =
£408
The £408 that Tom earns in year 1 is revalued at the end of the next year. So at the end of year 2, this
part of Tom's pension is £408 x 1.04 = £424.
Maintaining your pension’s
value
Revalued by 4% each year
Year 1 retirement pension Tom's pension for year 1 is £860
after 20 years' service.
The pension continues
to be revalued until you retire
27
Your pension at retirement
Annual pension at retirement If Tom has a 4% salary rise each year, by adding all of the
other years' pension pots together, he could expect a pension of £17,200 a year after 20 years' service.
You receive a new pension ‘pot’ for
each year you are a member
Add up the pension you earned each year (after it has been revalued) to
find your total pension
Adding your other years’ pension pots.
28
Valuation timetableEarly 2013:
Pre-valuation meetings to discuss valuation process
Summer 2013:
All data requirements provided to actuary
Data validated and declared “fit for purpose”
Autumn 2013:
Initial valuation results – whole fund
Meetings to agree final valuation assumptions
Final valuation results – individual employers
Winter 2013:
Agreement on final contribution rates for employers
By 31 March 2014:
Final valuation report (including Rates & Adjustments certificate)
29
AE: categorising workers
Non-eligible job holders
Entitled workers
Non-eligible job holders
Non-eligible job holders
75
SPA
22
16
£5,564Lower earnings
threshold
£8,105 Earnings
trigger
£42,475Upper earnings
threshold
Age
Earnings
Opt-in to a scheme (LGPS)
Opt-in to Qualifying Scheme (LGPS)
Auto-enrol to Qualifying Scheme (LGPS)
Qualifying Earnings
Eligible job holders
30
BIG money penalties for non compliance
Fixed penalty notice of £400
Prohibitive recruitment noticeBased on number of workers – but in total no more than £50,000
Escalating penalty notice£50 to £2.500 per day for less than 250 workers
£5,000 per day for 250 plus workers
£10,000 per day for 500 or more workers
31
New public sector scheme designs
Civil Service NHS Teachers LGPS
1/43 1/54 1/57 1/49
CPI CPI + 1.5% pa CPI + 1.6% pa CPI
Option to pay extra to retire 3
years before SPA
Same plus one-off “choice” for
protected members
Same plus higher conts for higher accrual
No rise in average conts, new “50/50”
option
Reference Scheme
CARE
SPA
1/60 + ave earnings
3.2% on contributions*
Uniformity sacrificed*Except LGPS
32
Will these reforms last 25 years*?
Possible spanners in the works...
Taxpayer savings don’t materialise
SPA not keeping up with life expectancy
Cost management (caps/collars etc) ineffective
Envy (continuing decline in private sector pensions)
Economy underperforming over long term
Politics (either lack of will or too much interference)
* Rt Hon Danny Alexander MP, November 2011