2019 valuation assumptions and amendments to the … · and set valuation assumptions. 3. following...

Pension Fund Committee

15th March 2019 Item 4 2019 VALUATION ASSUMPTIONS AND AMENDMENTS TO THE COUNCILS’ FUNDING STRATEGY Introduction

1. This paper provides the Committee with the opportunity to consider and endorse the proposed assumptions to set the funding target for the Fund’s upcoming formal valuation as at 31 March 2019. The paper also sets out proposed amendments to the Funding Strategy Statement to reflect amendments to the four Councils’ funding strategies.

Background Valuation Assumptions for the 2019 valuation

2. At the Member training session on 1 March 2019 the Committee received a presentation from the Fund Actuary setting out options and proposals of how to build and set valuation assumptions.

3. Following up from this session, attached as Appendix A to this paper is a formal

paper from the actuary, proposing assumptions to set the funding target for the Fund’s upcoming formal valuation as at 31 March 2019.

4. The Committee are asked to consider and endorse the proposed assumptions as

summarised in the Executive Summary in Appendix A. Amendments to the Councils’ funding strategies

5. Members also received a presentation on 1 March 2019 from the actuary providing the findings from a review of the current funding strategy for the four unitary Councils. Members will recall that the since the 2016 valuation, the Fund’s assets have performed much better than expected which has improved the funding position for the Councils.

6. As a result, the review of the funding strategy for the Councils identified that some

form of contribution rate relief would be possible within the Fund’s current funding risk framework.

7. Attached as Appendix B to this report is a formal paper from the actuary which sets

out the following proposed amendments to the Councils contribution rates in both the short and the longer term. These amendments would take effect from 1 April 2020.

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15th March 2019 Item 4 Table 1: Proposed Contribution Rates for the Councils from 1 April 2020

Proposed Rates Cheshire West and Chester

Warrington Halton Cheshire East

Short term (1 April 2020 onwards)

Decreases of 1% of pay per annum for 3 years

Decreases of 1.5% of pay p.a. for 3 years

Long term stabilisation parameter +/-1% of pay +/-1.5% of pay

8. If the Committee endorse these amendments, Officers will update the contribution rate stabilisation as detailed in Note (b) of Section 3.3 of the Funding Strategy Statement.

http://www.cheshirepensionfund.org/wp-content/uploads/2018/12/Funding-Strategy-Statement-Dec-2018.pdf

9. Employers will be formally consulted with all revisions to the Funding Strategy Statement from the 2019 valuation in one consultation in the later part of 2019 or early 2020.

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15th March 2019 Item 4 Recommendations

The Committee are asked:

• to consider and approve the proposed assumptions in Appendix A to set the funding target for the Fund’s upcoming formal valuation as at 31 March 2019 as summarised in the table below:

Table 2: Summary of proposed assumptions for 2019 valuation:

Assumption 2016 assumption Proposed 2019 Reason for change Discount rate

Margin above risk free rate

1.6% p.a.

1.6% p.a.

No change, level of prudence consistent with 2016 valuation

Pension Increases

RPI-CPI gap

CPI lower by 1.0% p.a.


No change

Salary increases

Inflationary

RPI less 0.7%

RPI less 0.3%

Expect higher short term pay increases

Longevity

Baseline

Future Improvements

Club Vita analysis

CMI model, 2013 version, long term rate of improvements of 1.25% p.a.

Club Vita analysis

CMI model (latest version), long term rate of improvements of 1.25% p.a.

No change in methodology. Later version of CMI table reflects more recent experience.

Withdrawals Increase in assumed rate of withdrawal to reflect recent experience

Ill health retirements Reduction in assumed incidences of ill health to reflect recent experience

Promotional salary increases

No change

50:50 take up option 5% 0% Reflect continued low take-up rate

Cash commutation No proposed change from 2016 valuation assumption

Pre-retirement mortality No proposed change from 2016 valuation assumption

Proportions married No proposed change from 2016 valuation assumption

Retirement age Slight adjustment to reflect emerging experience based on GAD’s analysis

• to consider the paper attached as Appendix B and endorse the amendments to

the Councils contribution rates summarised in Table 1, page 1 of this report.

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Pension Fund Committee 15th March 2019

Item 4 Appendix A

Cheshire Pension Fund | Hymans Robertson LLP

March 2019

2019 valuation: Setting the funding target

Executive Summary The Cheshire Pension Fund (“the Fund”) will undertake a formal actuarial valuation as at 31 March 2019. The valuation is a statutory requirement of the Regulations1 which facilitates a health check of the Fund against an appropriate funding target and a review of its funding plan. In order to carry out the valuation, actuarial assumptions are required to set an appropriate funding target.

The assumptions are informed estimates about future experience. Over time they may need to be updated to reflect emerging evidence and changes in the regulatory and environmental background. Ahead of the 2019 valuation, we have carried out a review of the assumptions that were used to set the funding target at the 2016 valuation. The results of our review are summarised below. Where we have suggested a change in assumption from 2016 we have also noted the reason.

Assumption 2016 assumption Proposed 2019 Reason for change assumption

Discount rate

Margin above risk free rate

1.6% p.a.

1.6% p.a.

No change, level of prudence consistent with 2016 valuation

Pension Increases

RPI-CPI gap



No change

Salary increases

Inflationary

RPI less 0.7%

RPI less 0.3%

Expect higher short term pay increases

Longevity

Baseline

Future Improvements

Club Vita analysis

CMI model, 2013 version, long term rate of improvements of 1.25% p.a.

Club Vita analysis

CMI model (latest version), long term rate of improvements of 1.25% p.a.

No change in methodology. Later version of CMI table reflects more recent experience.

Withdrawals Increase in assumed rate of withdrawal to reflect recent experience

Ill health retirements Reduction in assumed incidences of ill health to reflect recent experience

Promotional salary increases

No change

50:50 take up option 5% 0% Reflect continued low take-up rate

Cash commutation No proposed change from 2016 valuation assumption

Pre-retirement mortality No proposed change from 2016 valuation assumption

Proportions married No proposed change from 2016 valuation assumption

Retirement age Slight adjustment to reflect emerging experience based on GAD’s analysis

1 Local Government Pension Scheme Regulations 2013

Item 4 Appendix A - Page 1 of 23


15th March 2019 Item 4 Appendix A


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........................................................................................................................................................................................... 3

Contents

1 ADDRESSEE, PURPOSE AND BACKGROUND ................................................................................................................. 3

2 FINANCIAL ASSUMPTIONS .......................................................................................................................................... 4

2.1 DISCOUNT RATE ............................................................................................................................................................... 4 2.2 INFLATION / PENSION INCREASES ......................................................................................................................................... 6 2.3 SALARY INCREASES ............................................................................................................................................................ 8

3 DEMOGRAPHIC ASSUMPTIONS ................................................................................................................................. 12

3.1 LONGEVITY ................................................................................................................................................................... 12 3.2 RETIREMENT DEMOGRAPHICS ........................................................................................................................................... 13

4 RELIANCES AND LIMITATIONS ................................................................................................................................... 16

4.1 RESOURCE & ENVIRONMENT RISKS..................................................................................................................................... 16

APPENDIX 1 – FURTHER DETAIL ON DISCOUNT RATE ANALYSIS ........................................................................................ 17

APPENDIX 2 – FURTHER DETAIL ON SALARY INCREASE ANALYSIS ..................................................................................... 21



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1 Addressee, purpose and background

Addressee This paper has been commissioned by Cheshire West and Chester Council in its capacity as Administering Authority to the Cheshire Pension Fund (“the Fund”). It has been prepared by Hymans Robertson LLP in our capacity as actuaries to the Fund.

Purpose The purpose of this paper is to propose assumptions to set the funding target for the Fund’s upcoming formal valuation as at 31 March 2019. Background Pension schemes exist to pay benefits earned by their members during their years of eligible service. In the LGPS, the scheme is split into separate funds which pay benefits earned by employees of participating employers; the Cheshire Pension Fund is one such fund. The actual cost of paying all the benefits cannot be known with certainty until the final benefit payment is made to the last remaining member. In funded schemes like the LGPS, the benefits must be paid for out of funds set aside in advance. In order to determine how much money to set aside, it is necessary to make assumptions about the level of the benefits and the returns that will be achieved on the Fund’s assets (financial assumptions) and when benefits will be paid to members (demographic assumptions). These assumptions are agreed by the Fund based on advice from its actuary and are used to set the funding target.

The Fund will undertake a formal actuarial valuation as at 31 March 2019. The valuation is a statutory requirement of the Regulations which facilitates a health check of the Fund against an appropriate funding target and a review of its funding plan. In order to carry out the valuation, actuarial assumptions are required to set an appropriate funding target.

The assumptions are informed estimates about future experience. Over time they may need to be updated to reflect emerging evidence and changes in the regulatory and environmental background. Ahead of the 2019 valuation, we have carried out a review of the assumptions used to set the funding target at the 2016 valuation. The results of our review are summarised below. Where we have suggested a change in assumption from 2016 we have also noted the reason.

The following sections examine the main financial and demographic assumptions in detail.



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2 Financial assumptions

Broadly speaking, financial assumptions relate to the level of benefits (i.e. the amount in £) when they are in payment and their equivalent value in today’s terms.

2.1 Discount rate The discount rate assumption is how we allow at the valuation for future investment returns on the Fund’s assets. This is a key element and risk in funding and it is therefore important to develop a good understanding of how future investment returns, or the discount rate, have been modelled and incorporated into the funding strategy.

At the 2016 valuation, the Fund adopted a risk-based approach to setting contribution rates. This approach projects the Fund’s future investment returns for the next 20 years under a range of different economic scenarios generated by Hymans Robertson’s proprietary Economic Scenario Service (ESS). This model projects 5,000 different economic scenarios, on a year by year basis, and then analyses the expected performance of each of the asset classes the Fund holds under each scenario to generate the best possible understanding of the range of possible asset returns over the 20 year period. The range of investment returns over the next 20 years is therefore captured when setting contribution rates in the risk-based modelling rather than via a single discount rate assumption. (More details of the parameters of the ESS modelling will be provided as part of the valuation process).

Beyond a 20 year time horizon, the future becomes even more uncertain and we move to valuing future benefit payments by making a fixed assumption about future investment returns, or a long term target discount rate. This assumption is part of the funding target, and therefore the level of prudence in this assumption dictates the amount of assets the Fund wants to hold to pay for future benefits.

Each of the projected 5,000 scenarios represent different prevailing economic conditions in 20 years. Choosing a single absolute discount rate value to apply across all 5,000 scenarios would not be appropriate: e.g. a high discount rate would not be prudent in scenarios with a weak outlook for economic/investment growth. Instead, we need some way of setting the prudent return so it is appropriate in each of the 5,000 scenarios in force in 20 years’ time. We do this by expressing the discount rate relative to a variable which serves as a suitable proxy for the economic outlook in each scenario.

Our preferred choice for this variable is the long-term ‘risk-free’ interest rate, estimated using the yield on long- term UK government bonds at year 20 (as generated by our model for each scenario). This choice is justified on the basis that the Fund’s investment strategy will include a proportion of risky assets whose long-term returns can be expected to exceed the ‘risk-free’ rate. Indeed, the Fund will usually have expectations of what the margin is above ‘risk-free’ when investing in these different asset classes.

To calculate a suitable margin above the risk-free rate we have compared the overall Fund investment return against the returns on long-dated UK government bonds generated by the same model, both assessed from year 20. The following table shows the results of this analysis, i.e. the likelihood of the Fund’s assets achieving a specific return (or margin) above the risk-free rate. The analysis is based on the Fund’s long term strategic asset allocation that will apply to ongoing employers (further detail in Appendix 1).

Likelihood of achieving this margin from year 20 Margin above the risk-free rate (% p.a.)

1.4% 1.6% 1.8% Long-term ongoing investment strategy 74% 69% 64%



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Comparison with 2016 valuation The margin used in the discount rate at the 2016 valuation was 1.6% p.a.. This assumption was selected based on a model and analytic principles similar to that used in this paper. In the 2016 exercise, a margin of 1.6% had an associated likelihood of success of 67% based on a 50% growth/50% matching strategy.

Since the 2016 analysis was carried out, the assumptions in the model used to generate future investment returns have been updated to reflect changes in long term market expectations. The analysis has also been updated to provide further insight into the distribution of returns.

Other considerations Although the quantitative part of our analysis is focussed on the likelihood of success, it is important to consider other factors when choosing the discount rate. In practice any investment portfolio, especially one containing risky assets, will produce a range of returns which are sometimes lower than required according to the discount rate.

If the Fund was to choose a higher discount rate, it would be opting to target a less prudent funding position. Therefore:

• The Fund would gradually hold less money than it otherwise would have (all other things being equal).

• Long term asset liability modelling would show an increased likelihood of success under the same

contribution strategies (as the funding target is lower so it will cost less to get there).

• For employers not eligible for stabilisation, contributions would be set at a lower level as the target funding position is less prudent (and therefore lower).

• There is less chance of investment performance achieving this return each and every year in the future. If

there is any investment underperformance (relative to expectations), all other things being equal, higher than expected contributions would be required to compensate for the lost return.

• New academy schools may receive a greater asset share on conversion, as the ceding council will hold

back a smaller share of assets to fully-fund its deferred and pensioner members. This increases the risk that the ceding council will need to make additional contributions in future should the retained assets turn out to be insufficient.

• Where employers leave the fund and their cessation valuation is calculated on an ongoing basis (e.g. some

contractors), using a higher discount rate will result in less money being retained in the Fund to pay for their members’ benefits in future. This increases the risk that the retained funds turn out to be insufficient to pay for these benefits, and therefore increases the risk that any guarantor (usually the awarding authority) will be required to make up a future shortfall.

Other uses of the discount rate assumption By adding the margin to a suitable estimate of the ‘risk-free’ interest rate, it can be used to set a discount rate assumption at any date. The same principle of adjusting market related rates by an appropriate amount can be used with the other financial assumptions, i.e. applying a fixed margin to the market-derived inflation expectation (for RPI) to get the pension increase (CPI) and salary increase assumptions. We can therefore calculate the market-related value of the past service liabilities on any date, and compare it to the market value of the Fund’s assets on the same day. This provides a high level comparison of today’s funding position against the funding target (the ‘funding level’).

It is important to note that the link between the current funding level and the contribution rate is weaker under the risk-based approach than under the traditional approach using a single set of assumptions. The current funding level is therefore less significant as a driver of employer contributions than it used to be.



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Furthermore, for comparison purposes, all LGPS funds are likely to be required by the Scheme Advisory Board to report their 2019 valuation funding position on a like-for-like basis i.e. using the same actuarial assumptions. This will reduce the focus, and therefore the importance attached at a national level, from the current funding position on the Fund’s own funding basis.

Recommended assumption Given that the results of the analysis are similar to that undertaken at the last valuation, and after discussions with the Fund’s Officers , we are not aware of any desire to alter the level of prudence in the funding strategy, we recommend that the margin above the risk-free rate for the 2019 valuation remains at 1.6%.

2.2 Inflation / pension increases LGPS benefits increase each year in line with the Consumer Prices Index (“CPI”) measure of inflation, which is therefore a key financial assumption for the valuation. The most objective way to measure future financial values is to use information from the financial markets. In theory, the CPI assumption would be set based on the prices of CPI-linked government bonds, which would give the market’s expectation of future CPI increases. If the return on a conventional government bond was 3% p.a. and the return on an (otherwise identical) CPI-linked government bond was 1% p.a., this would imply that the market expects long-term CPI inflation to be 2% p.a.. However, in the UK the only inflation-linked government bonds are based on the Retail Prices Index (“RPI”), an alternative measure of price increases. We therefore calculate the market-implied value of future RPI increases and adjust it to get an assumption for CPI.

The two main differences between RPI and CPI are

• The ‘basket’ of goods that each measure is based on (e.g. CPI doesn’t include mortgage payments and

RPI doesn’t include the cost of new cars); and

• The ‘formula effect’ which is related to the way the index is calculated from the price changes of the goods in the basket.

At the 2016 valuation, CPI was assumed to be 1.0% less than RPI.

When considering the assumption for the 2019 valuation, we have taken into account:

• Proposed changes to the indexation measure of public sector pensions: in the 2018 Budget, the Chancellor

announced that all public sector pensions, including the LGPS, will move the inflation indexation measure “over time” from CPI to a measure known as CPIH (similar to CPI but it includes owner occupier’s housing costs) “when and where practicable”. There is no set timeframe on this move, therefore we propose to make no explicit allowance for this change at the 2019 valuation.

• Observed differences between RPI and CPI: the chart below analyses the observed differences between RPI and CPI (and CPIH) since 2006.




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In the above chart, the difference between RPI and CPI has remained relatively steady since the start of the decade at around 1.0%. This does not give us any cause to recommend a change to the assumption due to emerging observable evidence.

Recommended assumption Based on the above analysis and reasoning, we recommend the CPI assumption at the 2019 valuation is 1.0% p.a. less than assumed RPI.

Inflation risk premium The method described above assumes that the yields on conventional and inflation-linked bonds differ only by the market’s expectation for future inflation. Some argue that part of the difference is explained by an ‘inflation risk premium’, which effectively lowers the yield of inflation-linked bonds because the market is prepared to pay more for the extra protection against future inflation being higher than expected.

Our general view is that we are sceptical whether this over-pricing of index-linked gilts exists in reality.

If over-pricing of index-linked gilts were true, then we would see a premium attached to index-linked gilts but not to fixed-interest gilts. For instance, in different market conditions investors would be willing to pay more or less for RPI protection than they would for simple safety in fixed interest gilts. However, analysis of yields over the past few years (see chart below) does not tend to support that view:



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UK gilt yields and implied RPI inflation since 1 Jan 2008

Other than the time of the banking crisis in late 2008/early 2009, the fixed interest yields (in green) and index- linked yields (in orange) are very closely correlated. This holds true in all manner of markets, from when nominal yields were around 5% to the current position where they are below 2%.

If an inflation risk premium existed, then we would expect to see changes in the relationship between the two yield lines reflecting the shifting needs of markets between RPI inflation protection and simple “flight to safety” purchasing of gilts. However, despite these varying conditions, the difference between the two (the blue line – market-implied RPI inflation) has remained fairly steady (the increase in mid-2016 is due to the outcome of the Brexit vote and market expectations that Brexit will lead to higher long-term inflation).

Furthermore, adoption of an Inflation Risk Premium would require the Fund to make a subjective choice for the value of any risk premium. It is best practice for any funding assumption to be evidence based. As we have discussed above, there is little evidence to use to help inform the choice of a risk premium value. Therefore, the Fund would be making a subjective decision with little evidence to back up the decision.

Recommended assumption We recommend that the 2019 valuation does not use an inflation risk premium (as per the 2016 valuation).

2.3 Salary increases The salary increase assumption comes in two parts:

• Annual ‘inflationary’ salary awards, historically set in order for employees’ pay to at least keep up with the

cost of living • Promotional salary awards or those awarded as part of a defined salary scale.

This part of the paper considers the first element of the salary growth assumption only. Assumptions about promotional salary awards are considered later under Demographic Assumptions.



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At the 2016 valuation, the assumption for ‘inflationary’ increases needed to take into account the following:

1 A large proportion of the Fund’s overall past service liabilities were still linked to final salary i.e. those benefits accrued before 31 March 2014; and

2 The Government’s 2015 Summer Budget announced that funding would only be provided to meet public sector salary increases of 1% p.a. up to March 2020.

Therefore the 2016 valuation salary increase was based on an underlying assumption of short term restraint (1% p.a.) to 31 March 2020, followed by long-term increases in line with Retail Prices Index (RPI) inflation plus 0.5%. The single equivalent rate based on these assumptions, allowing for the expected run-off of final salary liabilities for a typical LGPS fund, was RPI less 0.7% p.a..

When considering the assumption to use at the 2019 valuation, we have revisited the two considerations outlined above.

Run-off of final salary liabilities Future pensions in respect of service accrued in the Fund up to 31 March 2014 will be determined based on members’ eventual final pay at retirement (or earlier withdrawal). Benefits accrued from 1 April 2014 are based on the members’ pay over each year of accrual and future Consumer Prices Index (CPI) increases (unless protected by the Final Salary underpin). When considering the relevance of future pay growth on the Fund’s past service liabilities, only benefits accrued up to 31 March 2014 (“final salary benefits”) need be considered.

The chart below shows the expected run-off of a typical LGPS fund’s pre-2014 active member liabilities from the Fund’s 2013 valuation analysis i.e. the proportion of final salary liabilities remaining at each future year. The chart starts at 100% and falls eventually to zero as current active members with final salary benefits leave active status (due to retirement, withdrawal or death).

The declining proportion of active liabilities with a link to salary increases means that the importance of the salary growth assumption decreases over time, at least as far as the liability value is concerned. By 2019, around half of the pre-2014 active liability will no longer be active. Furthermore, from 2019 onwards the run-off plateaus and becomes more gradual; illustrated by the chart below. For example, in the chart above it takes around 5 years for the proportion to fall to 50%.



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In order to consider the appropriate assumption for the 2019 valuation, analysis of the run-off of the active liabilities in the Fund has been carried out. The chart below shows that it takes around 7 years for the proportion of active liabilities with a link to salary increases to fall below 50%.

The more gradual run-off means that the importance of the short-term salary growth expectation is less than it was at 2016. Therefore, whilst it is important to allow for any short-term restraint in the assumption adopted at the 2019 valuation, it will have less influence on the overall salary growth assumption compared to the 2016 valuation.

Future pay progression Public sector pay increases were suppressed for many years following the 2008-09 economic crisis and the introduction of austerity policies, and this restraint had been expected to continue until at least 2020. Until 2017, central government operated a 1% cap on pay increases which was broadly mirrored in local government. However, with higher inflation and low unemployment the pressure to increase wages has risen markedly in recent years, particularly as public sector pay lagged behind the private sector. The government announced in July 2018 that it was awarding the highest pay increases in ten years to a range of public sector workers including teachers, NHS workers and the armed forces, perhaps signalling a return to ‘normal’ pay increases with a closer link to price inflation.

However, pay increases in local government are determined by local councils rather than central government, and the effects of austerity are still being felt in strained local authority budgets. It may therefore be reasonable to expect some continued restraint in the short term albeit higher than the 1% p.a. previously assumed. A reasonable expectation might be around 2% p.a. until 2023. We will also allow for the budgeted 2.7% increase in 2019.

As for long term pay increases, similar arguments apply now as at the previous valuation in 2016. In the long term, increases are likely to fall between two extremes:

• Pay is increased substantially from current levels in order for public sector pay to ‘catch-up’ with historic

averages (and the private sector).

• Continued low real pay rises reflecting, for example, higher inflation, economic uncertainty, outsourcing to private sector contractors, etc.



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In practice, long term public sector salary growth beyond 2023 will depend on a variety of factors and it is extremely difficult to predict with any certainty what it is likely to be.

The RPI measure of inflation is arguably the better measure experienced by the ‘in-work’ population, due to the inclusion of housing costs (which are not included in the official CPI measure of inflation). In addition, some of the key elements of an individual’s expenditure are set relative to RPI, for example regulated rail fares are currently increased each year in line with RPI plus 1% p.a. Post 2023 pay growth negotiations may therefore be conducted on grounds that salaries stay closer in line with the annual growth in RPI and therefore this is seen as an appropriate assumption to use for pay growth post 2023.

When we combine the short term pay restraint of 2.7% in 2019 and 2% p.a. until 2023, and the longer term assumption of increases in line with RPI inflation, we can calculate a weighted average single pay increase assumption. Based on the Fund’s membership profile, the weighted average single pay increase assumption is equal to RPI – 0.3%. To help understand the impact of the short term pay growth, if long term pay growth after 2023 was assumed to revert to RPI + 0.5%, the single pay increase assumption changes to RPI + 0.1%. If it was assumed to revert to RPI - 0.5%, the single pay increase assumption would be RPI – 0.7% p.a..

Further detail of this analysis is included in Appendix 2.

Recommended assumption Based on the above analysis and reasoning, we recommend a pay growth assumption of RPI – 0.3% for the 2019 valuation.



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3 Demographic assumptions

Broadly speaking, demographic assumptions relate to the timing of benefits, i.e. when they start and for how long they are paid.

3.1 Longevity Of all the demographic factors, longevity is the one that presents the greatest uncertainty to an LGPS fund. There are two components when setting an assumption for longevity:

1. How long people live for based on current observed life expectancies (‘baseline longevity’); and

2. An allowance for possible future improvements to longevity (‘future improvements’).

The LGPS Longevity Index1 shows that life expectancy in the LGPS has been steadily increasing over the last 20 years. This has been reflected in the longevity assumptions set by actuaries at successive valuations, which have often led to an increase in the value of the past service liabilities and higher contribution rates payable by employers, as improvements outstrip expectations.

However, death experience in recent years has bucked the trend. Evidence from Club Vita, our specialist longevity consulting company, tells us that there have been more deaths of LGPS pensioners than expected since 2016. We would therefore anticipate there to be fewer pensions in payment in 2019 than expected. This will, for a typical scheme, lead to a reduction in liabilities at the 2019 valuation (although the actual effect will vary across different funds and employers depending on the actual experience of their members).

Baseline longevity The effect of recent experience will be reflected and allowed for (in part) in the 2019 valuation baseline longevity assumption. As the Fund is a member of Club Vita to benefit from a greater understanding of longevity risk, we recommend that the baseline longevity assumptions to adopt at this valuation are a bespoke set of VitaCurves that are specifically tailored to fit the membership profile of the Fund. These curves are based on data the Fund provides us for the purposes of the valuation. This method is more accurate than trying to fit standard mortality tables to reflect the Fund’s membership.

This is the same approach that was adopted at the 2016 valuation.

Future improvements As mentioned above, recent evidence suggests that death rates were higher than expected based on the trend over the previous decade. This may strengthen the view that we are seeing the beginnings of a new trend. However, it is not totally conclusive.

The headlines about the slowdown in life expectancy improvements have been based on national population data. Therefore, we need to understand the extent to which this apparent change in trend in general population data is relevant to LGPS funds’ membership. Recent analysis from Club Vita has shown that in fact not all pensioners have seen a similar downturn in life expectancy improvements over recent years. In particular, the more affluent members (those with high pensions or living in affluent areas) appear to have seen little downturn in the rate of increase of life expectancy. Given such members will typically represent a large proportion of the Fund’s liabilities, we would be cautious about assuming future improvements will follow the same trajectory as the general population.

1 LGPS Longevity Index has been developed as a joint venture between Hymans Robertson, Club Vita and the Local Government Association Item 4 Appendix A - Page 12 of 23


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The 2016 assumption for future longevity improvements was based on a ‘wait and see’ approach. This was on the basis that:

• The longevity risk faced by funds is mitigated in part by the link between Normal Retirement Age and State

Pension Age for future service benefits (which in turn, is expected to increase in the future in line with increases in life expectancy);

• The LGPS ‘employer cost cap’ includes longevity as a cost control mechanism, thus mitigating the impact

of future longevity improvements; and

• Local authority funds have a long-term time horizon over which to fund improvements in longevity if they emerge.

We based our 2016 assumption on the 2013 version of the Continuous Mortality Investigation (CMI) longevity improvements model, which is published by the Actuarial Profession, and allowed only for data up to 2014, rather than the heavier experience of more recent years, when setting initial rates of improvement. We assumed that these improvements would immediately start to tail off to a long-term rate of 1.25% p.a.

Our recommended assumption for the 2019 valuation is to use the latest available version of the CMI longevity improvements model. This version includes a number of structural changes compared to previous versions of the model – in part due to concerns around sensitivity to recent experience. This model is built using England & Wales population data to estimate current rates of improvement. As such, simply moving to the latest version of the CMI model would reflect recent heavy experience in the short term.

Given that there remains some uncertainty around whether there is sufficient evidence to conclude that recent heavier than expected mortality experience is the start of a new trend, and the extent to which any such change in trend at the general population level would be relevant for the specific membership of the Fund, we recommend adjusting the model to reduce the impact of the last few years of observed heavy mortality experience. This is in line with the ‘wait and see’ approach adopted at the 2016 valuation and reflects the very long-term nature of the Fund.

Our view of the longer term is unchanged, therefore we recommend retaining the assumption for the long term rate of improvements of 1.25% p.a. (equivalent to around an extra 1 month of life expectancy per year). In addition we recommend that this long term rate will tail off above age 90, down to 0% at age 120, in line with the assumption at the previous valuation.

Overall, we would describe the recommended assumptions as reflecting recent longevity experience whilst retaining a ‘wait and see’ approach on the future (as we continue to monitor how longevity experience for LGPS members evolves over time) in order to avoid understating the likely rates of improvement.

Recommended assumption Baseline: bespoke VitaCurves set at individual member level

Future improvements: latest version of the CMI model, adjusted to dampen the impact of recent heavier than expected mortality, long term improvement rate of 1.25% p.a..

3.2 Pre-retirement demographics Assumptions such as the rate at which members are assumed to leave local government employment with a deferred pension and the assumed incidence of ill-health early retirements affect the assessed cost of benefits accrued to date (“past service liabilities”) and the cost of benefits accrued in future (“future service rate”).

The starting point for our proposed 2019 valuation assumptions was to analyse past experience over 2013 to 2016 for all the LGPS funds Hymans Robertson advises (40 funds in England & Wales). We use such a large



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data set to give us a big enough sample size for our analysis to be statistically credible. Some of the experience we analyse is rare, therefore we need a sufficiently large number of events to enable credible analysis. We then consider the analysis and make any adjustments to allow for any other external factors which may impact on the future rate of occurrence of each event.

Withdrawals (excluding ill health) The rate of withdrawal only affects final salary liabilities, as CARE benefits are revalued in the same way for active and deferred members (both in line with CPI). Based on our analysis of withdrawal experience from 2013 to 2016 at a national level we have made increases to the likelihood of withdrawals at each age so our assumption better reflects recent experience.

Ill health early retirements The national analysis carried out for the 2019 valuation suggests that the incidence of ill-health retirements is lower than expected at 2016. Therefore we have lowered the assumption for the 2019 valuation which will result in slightly lower contribution rates.

Salary scale As mentioned earlier, our assumption for pay growth has historically been split into general inflationary pay increases and promotional pay growth. At the 2016 valuation we used the same promotional pay scale for all members i.e. there is no split between men/women, full-time/part-time employees and officers/manual workers. The national analysis carried out for the 2019 valuation does not suggest that any change is required to the salary scale used for the 2016 valuation.

Death in service The incidence of death in service is very low. Our analysis at national level for the period 2013 to 2016 was very similar to the 2016 valuation assumption. Therefore we have not made any change from the assumption used for the previous valuation.

50:50 take-up option From 1 April 2014, members have been able to elect to pay half the standard level of contributions for half the accrued benefit (i.e. an accrual rate of 1/98). This option affects future service only (past service is protected) and the employer’s cost will fall as a result of members choosing this option. This benefit is known as the 50:50 benefit.

At the 2016 valuation we assumed that 5% of members (uniformly distributed across the age, service and salary range) would choose to take up the 50:50 option. This was agreed based on the actual Fund take-up at 2016 of less than 0.1% but allowing for the possibility of higher take up in future, particularly if awareness of the option increased.

Based on data from 2018, take up of this option has continued to remain very low – around the 0.1% mark. It is still not clear whether take-up will remain low or increase in future due to the impact of more awareness campaigns and lower tax allowances. Therefore, after discussions with the Fund’s officers, an assumption of 0% take-up has been proposed.



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Other demographic assumptions In light of our analysis, at the 2019 valuation we propose no change from the 2016 assumptions regarding:

• Allowance for dependant’s benefits (i.e. the proportion of members with an eligible dependant, and the age

difference between husbands and wives)

• Recommended cash commutation assumption of 50% of HMRC limits for service to 1 April 2008 and 75% of HMRC limits for service from 1 April 2008 (if the Fund wishes, we can carry out analysis to examine commutation take-up and amend if appropriate).

At the 2016 valuation, our retirement age assumption was set to mirror the assumption used by the Government Actuary’s Department for the purpose of costing the LGPS 2014 scheme. GAD have recently updated this assumption in light of emerging experience based on analysis of data at national level. We will update our assumption in line with these changes (this will have minimal impact on the past service liabilities or future cost of benefits).



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4 Reliances and limitations

This information is addressed to Cheshire West and Chester Council as Administering Authority to the Cheshire Pension Fund. It has been prepared in our capacity as actuaries to the Fund and is solely for the purpose of discussing the assumptions for the 2019 formal valuation and sets out our recommendations. It has not been prepared for any other purpose and should not be used for any other purpose.

The Administering Authority is the only user of this advice. Neither we nor Hymans Robertson LLP accept any liability to any party other than the Administering Authority unless we have expressly accepted such liability in writing. The advice or any part of it must not be disclosed or released in any medium to any other third party without our prior written consent. In circumstances where disclosure is permitted, the advice may only be released or otherwise disclosed in its entirety fully disclosing the basis upon which it has been produced (including any and all limitations, caveats or qualifications).

Please see the appendices for additional reliances and limitations which apply to the discount rate and salary growth analysis supporting this paper.

The following Technical Actuarial Standards are applicable in relation to this advice, and have been complied with where material and to a proportionate degree:

• TAS100; and

• TAS300.

4.1 Resource & environment risks The weight given to resource & environment issues should depend on a Fund’s circumstances, including its funding position and maturity, its investment strategy and its sponsor’s industry sector. These risks exist and may prove to be material, however, given the lack of relevant quantitative information available specifically relevant to the Fund and the valuation assumptions, we have not explicitly incorporated such risks in this paper.

Gemma Sefton FFA Robert Bilton FFA

7 March 2019

For and on behalf of Hymans Robertson LLP



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Appendix 1 – Further detail on discount rate analysis

Methodology To help the Fund consider the discount rate assumption we have used a model that generates thousands of possible future investment returns for a given investment strategy. In this case we have modelled returns starting from 20 years in the future, to fit in with the risk-based methodology outlined in Section 2.1. Further detail on the model used to generate the expected returns is given below.

By analysing the distribution of returns generated by the model over years 20 to 40 we can determine

• the most likely or ‘best estimate’ return – we expect the portfolio to do better than this 50% of the time;

and

• a prudent estimate of returns – we expect the portfolio to do better than this 66% of the time.

For the purposes of setting the discount rate we use the prudent estimate to be consistent with the Fund’s risk appetite and Funding Strategy Statement (and as required by the LGPS Regulations).

The results of this analysis provides a single future investment return assumption from year 20 onwards. However, as discussed in Section 2.1, at the end of the 20 year projection period there are various economic scenarios and market conditions in force. If we simply assumed the same fixed future return for all scenarios, then there will be cases where the assumed future investment return will be too high and therefore not sufficiently prudent (e.g. in a low growth scenario). Similarly in a high growth scenario, the fixed future return might be too low and therefore too prudent for the Fund’s investment and funding plans.

The chart below illustrates how the investment returns generated by the model vary over time, including the transition to a flat assumption after year 20. Although the assumption stops varying within each scenario after this point, it still varies across the different scenarios depending on the economic outlook in each one.



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March 2019


Therefore, we need some way of translating the prudent return so it is appropriate for whichever market condition is in force in 20 years’ time.

Our preferred approach is to express the future investment return as a margin above long-term ‘risk-free’ interest rates. The yield on long-term UK government bonds at year 20 (as generated by our model) is viewed as a suitable estimate of the risk-free interest rate at that time. This approach is justified on the basis that the Fund’s investment strategy will include a proportion of risky assets whose long-term returns can be expected to exceed the ‘risk-free’ rate. Indeed, the Fund will usually have expectations of what the margin is above ‘risk-free’ when investing in these different asset classes.

The margin is calculated by comparing the prudent overall Fund investment return against the best estimate return on long-dated UK government bonds generated by the same model, both assessed from year 20.

Scenarios modelled We have modelled the following investment strategy, representing the likely investment strategy for ongoing employers in the Fund in 20 years’ time based on discussions with Fund officers:

Asset class Allocation Infrastructure (equity) 5% Overseas equities 20% Private equity 5% Total growth 30% Alternatives 5% Hedge funds 5% Multi asset credit 20% Property 10% Total income-generating 40% Index-linked gilts 30% Total protection 30% TOTAL 100%

The grouping of asset classes into growth, income-generating and protection categories is purely presentational and does not affect the results.

Model details We have used Hymans Robertson’s proprietary financial model, the Economic Scenario Service (“the ESS”) to project a range of possible outcomes for the future behaviour of asset returns and economic variables. Some of the parameters of the ESS are dependent on current market conditions, while other more subjective parameters do not usually change. The key subjective assumptions underlying the ESS are the average level and volatility of equity prices, bond yields, credit spreads and inflation. The model is also affected by other more subtle effects, such as the correlations between asset classes.

The following figures have been calculated using 5,000 simulations of the ESS, calibrated using market data as at 30 November 2018. All returns are shown net of fees. Percentiles refer to percentiles of the 5,000 simulations and are the annualised total returns over 5, 10 and 20 years, except for the yields which refer to the simulated yields at that time horizon.



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The current calibration of the model indicates that a period of outward yield movement is expected. For example, over the next 20 years our model expects the 17 year maturity annualised real (nominal) interest rate to rise from -1.6% (2.0%) to 0.8% (4.1%).

Portfolio returns The chart below shows the distribution of returns for year 20 to 40 based on the investment strategy outlined above. The vertical axis is the proportion of simulated outcomes achieving the return on the horizontal axis. The best estimate return is generally at the peak of the distribution, with an equal number of outcomes above and below it. The prudent return lies to the left of this, so that a majority (66%) of outcomes are above it.

The strategy includes a substantial allocation to risky growth assets, so it produces a wide range of expected returns. In general, the lower the growth asset allocation, the more predictable the returns so the narrower the distribution.

Additional professional notes The distributions of outcomes depend significantly on the Economic Scenario Service (ESS), our (proprietary) stochastic asset model. This type of model is known as an economic scenario generator and uses probability distributions to project a range of possible outcomes for the future behaviour of asset returns and economic



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variables. Some of the parameters of the model are dependent on the current state of financial markets and are updated each month (for example, the current level of equity market volatility) while other more subjective parameters do not change with different calibrations of the model. Key subjective assumptions are the average excess equity return over risk free assets, the volatility of equity returns and the level and volatility of yields, credit spreads, inflation and expected (breakeven) inflation, which affect the projected liability and bond returns. The output of the model is also affected by other more subtle effects, such as the correlations between economic and financial variables. Our expectation (i.e. the average outcome) is that long term real interest rates will gradually rise from their current low levels. The mean reversion in yields also affects expected bond returns.

While the model allows for the possibility of scenarios that would be extreme by historical standards, including very significant downturns in equity markets, large systemic and structural dislocations are not captured by the model. Such events are unknowable in effect, magnitude and nature, meaning that the most extreme possibilities are not necessarily captured within the distributions of results. Given the context of this modelling, we have not undertaken any sensitivity analysis to assess how different the results might be with alternative calibrations of the economic scenario generator.

The returns presented here are time weighted returns over the specified period and are unaffected by the timing of any contributions received or pensions paid over that period. Such returns are, in general, a poor estimator of money weighted returns, which are sensitive to the timing of cashflows.

The probability that a specific asset return will be exceeded will not usually equate to the probability that some funding plan based on this return will be sufficient to meet all the pension payments. Complex interactions between the assets, yields and cashflow timings can mean that the two probabilities are materially different, especially for more mature schemes. We would be happy to provide fuller information about the scenario generator, and the sensitivities of the results to some of the parameters, on request.

We have not explicitly considered the impact on future economic returns and conditions arising from resource and environment issues. However, the stochastic approach means that an allowance for negative future scenarios is in effect built in to the model details as described above.



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Appendix 2 – Further detail on salary increase analysis

Pay scenarios modelled In order to help discussions around the setting of an ‘inflationary’ salary growth assumption at the 2019 valuation, we have considered three scenarios. Note that the salary growth assumption should be a best estimate assumption. Prudence in funding plans is explicitly allowed for elsewhere.

In all three scenarios we have considered short term increases of 2.7% in 2019/20 and 2% in each of the following three years. This pattern is based on discussions with the Fund. Thereafter we have modelled a central long-term assumption that salaries will increase in line with RPI inflation, again based on discussions with the Fund. To show the sensitivity of the results to this assumptions, we have also modelled long-term increases in line with RPI +/- 0.5% p.a..

In all cases, we have calculated a single equivalent salary growth assumption which allows for the projected run- off of the final salary linked past service liabilities. For each scenario, the equivalent flat assumption gives the same overall revaluation over the period when any pre-2014 benefits are expected to remain linked to salary growth (approximately 40 years). This is the same approach as used when setting the assumption for the 2016 valuation.

The scenarios can be summarised as follows:

% p.a. Scenario 1 Scenario 2 Scenario 3 Short term (1st year) 2.7% 2.7% 2.7% Short term (to 2023) 2.0% 2.0% 2.0% Long-term RPI RPI less 0.5% RPI plus 0.5% Nominal long-term rate* 3.4% 2.9% 3.9%

* Based on market conditions as at 28 February 2019.

Results Based on the run-off of final salary liabilities in section 2.3 and the scenarios described above, we have calculated the following equivalent flat rate assumptions for each scenario.

The results also show approximately what impact the new assumption will have at the 2019 valuation, by showing the approximate impact on the funding position. This allows for the run-off of final salary liabilities as well as the change in salary growth assumption, but makes no other allowances (e.g. for changes in market conditions). The actual impact at the 2019 valuation will depend on the actual membership data and assumptions at 31 March 2019.

% p.a. Scenario 1 Scenario 2 Scenario 3 Flat rate assumption RPI less 0.3% RPI less 0.7% RPI plus 0.1% 2016 assumption RPI less 0.7% RPI less 0.7% RPI less 0.7% Approximate change to 2019 funding level

(1%)

-

(2%)

At the 2016 valuation the salary growth assumption was changed significantly to reflect the closure of the final salary scheme and the long period of expected pay restraint. This change led to a relatively large improvement in the funding position at the 2016 valuation due to the amount of final salary linked liabilities.

Relative to the change between 2013 and 2016, the impact on the overall whole fund funding position in 2019 under any of the scenarios will be lower. However, for employers with large proportions of active members and/or



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large proportions of final salary linked liabilities, the impact of any change to the assumption will be greater than shown above.

As mentioned in section 2.3, consideration of the salary growth assumption should go beyond the impact on the past service liability value. The salary growth assumption is also an important factor in estimating the size of future payroll and contributions. Given the increased gearing (ratio of accrued benefits relative to payroll) in the LGPS, a realistic estimate of the future payroll is more important to help assess the most appropriate contribution and investment strategy for the Fund and its participating employers.

Data and assumptions The data underlying the results in this paper is a subset of the data used for the 2016 formal valuation. A summary is shown below, and further details can be found in the 2016 formal valuation report.

31 March 2016 Number of active members 26,771 Total full-time equivalent salaries (£000) £599,893 Total final salary pensions (£000) £76,331

The figures above are based only on those members who had any pre-2014 service at the 2016 valuation. Members who joined after 31 March 2014 and who have no final salary benefits are excluded from the analysis.

All the liability figures quoted in this paper are as at 31 March 2016 and use the assumptions adopted for the 2016 formal valuation. Please see the formal valuation report dated March 2017 for further details.

Projections of future pay growth were based on the following assumptions, derived in the same manner as at the 2016 formal valuation but updated for market conditions as at 28 February 2019:

28 February 2019 RPI inflation 3.4% Gap between RPI and CPI inflation (1.0%)

Reliances and limitations We have based our calculations on the data and assumptions used for the purposes of the 2016 formal valuation. For further details please see the 2016 formal valuation report, dated March 2017.

The following limitations apply in relation to this advice;

• The analysis is based on market conditions as at 28 February 2019. If market conditions at 31 March

2019 have changed significantly, particularly if the gap between the short and long term pay increase assumptions is significantly different, then we may need to revise the results.

• No allowance has been made in this analysis for service accrued from 1 April 2014 for members aged 55

or over on 1 April 2012 and therefore entitled to the final salary benefit underpin. Due to the nature of these liabilities, (these members are expected to have left active service prior to 2022) this is expected to have only a negligible impact on the shape of the active liability run-off and the outcomes derived from this analysis.

• No allowance has been made in the analysis for the possible impact of the recent McCloud judgement.

At this stage it is too early to say what this impact will be and how it will be felt.



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• No allowance is made in the analysis for early retirements (except as already allowed for in the 2016 retirement age pattern), ill health retirements or any other pre-retirement exits such as death or refund of contributions.

• The analysis is based on the withdrawal assumptions set out in the formal valuation report for the 2016

valuation. Although these assumptions have been revised for the 2019 valuation (see section 3.2), we do not expect this to have a material impact on the outcomes from this analysis.

• The analysis is based on membership data from the 2016 valuation, which was validated at the time. If

there are any material errors or omissions in the data they could affect the results, particularly if they affected how quickly final salary benefits were expected to run off.

• The impact on the funding level is approximate and allows only for the change in salary growth

assumption and the expected run-off of final salary liabilities by 2019. The actual financial impact of any change in the assumption, measured at the 2019 valuation, may be higher or lower than given above, depending on finalised active membership details and market conditions at 2019.



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March 2019

2019 valuation: review of Councils’ funding strategy Addressee and purpose This note is addressed to Cheshire West and Chester Council as Administering Authority to the Cheshire Pension Fund (“the Fund”). Its purpose is to summarise the review of the funding strategy, as part of the 2019 valuation, for each of the councils named below (“the Councils”):

• Cheshire West and Chester Council

• Cheshire East Council

• Halton Borough Council

• Warrington Borough Council

This note may not be passed on to any third party, except as required by law or regulatory obligation, without the prior written consent of Hymans Robertson LLP. If it is passed onto a third party, then it should be provided in full.

Background As part of the 2019 valuation, a review is carried out of the funding strategy for all employers in the Fund. As the Councils are stable, open, long term employers modelling techniques can be used to review their funding strategies ahead of the valuation date itself. Such analysis was carried out in late 2018 and discussed with the Fund’s Officers. The results were then communicated in detail to the Pensions Committee at the training session on 1 March 2019. A copy of the material used for this session is contained in the Appendix to this paper.

Results At the 2016 valuation, the funding strategy for the Councils required increases in contributions payable and their expectation for 2019 was that these increases would continue. The funding strategies were formalised as per the below table:

Rates Cheshire West Warrington Halton Cheshire East

Long term stabilisation parameter

+0.5 / -0.5% of pay +1.5% / -0.5% of pay

Since the 2016 valuation, the Fund’s assets have performed much better than expected which has improved the funding position for the Councils. As a result, the review of the funding strategy for the Councils identified that some form of contribution rate relief would be possible within the Fund’s current funding risk framework. As such, the following funding strategies applicable from 1 April 2020 have been proposed:

Proposed rates Cheshire West Warrington Halton Cheshire East

Short term (1 April 2020 onwards)

Decreases of 1% of pay per annum for 3 years Decreases of 1.5% of pay p.a. for 3 years

Long term stabilisation parameter

+/-1% of pay +/-1.5% of pay

These results represent good news for both the Councils and the Fund:

Item 4 Appendix B - Page 1 of 3


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March 2019

• Councils: contribution rate reductions from 1 April 2020 for 3 years will help relieve budgetary pressuresand increasing the downward stabilisation parameter provides the opportunity for the Councils to benefitsooner (in the form of larger contribution rate reductions) from any future positive experience.

• Fund: the positive results evidence the success of the funding strategy implemented and the widening ofthe long term stabilisation parameters for the Councils (both upwards and downwards) gives greaterflexibility in the long term to manage contribution rates for the Councils.

Next steps As part of the 2019 valuation process, the Funding Strategy Statement (“FSS”) of the Fund will be updated and revised to reflect any changes to the funding strategy identified during the valuation. As part of this review, the revised funding strategies for the Councils as outlined above, which come into force from 1 April 2020, will be included. This will involve adjusting details about the contribution rate stabilisation as detailed in Note (b) of Section 3.3 in the Fund’s current FSS.

Reliances and limitations This note is addressed to Cheshire West and Chester Council as Administering Authority to the Cheshire Pension Fund. It has been prepared in our capacity as actuaries to the Fund and is solely for the purpose as described above. For the avoidance of doubt, this note solely seeks to summarise the results of the review of the Councils’ funding strategy and does not contain any actuarial advice.

The following Technical Actuarial Standards are applicable in relation to this note, and have been complied with to a proportionate degree:

• TAS 100

Prepared by:-

Gemma Sefton FFA Robert Bilton FFA

For and on behalf of Hymans Robertson LLP

7 March 2019

Item 4 Appendix B - Page 2 of 3


Hymans Robertson LLP is authorised and regulatedby the Financial Conduct Authority

Valuation Update and comPASS Results

• Gemma Sefton FFA• 1 March 2018

Cheshire Pension Fund

Appendix – 1 March 2019 committee training material

Pension Fund Committee15 March 2019

Item 4 - Appendix B

2525

Contribution Modelling – Recap of 2016 Results

26

Outcome of 2016 modelling

CWAC WBC HBC CE

2016/17 rate 22.4% 21.9% 21.4% 28.6%

Stabilised increaseseach year +0.5% +0.5% +0.5% +1.5%

2019/20 rate 23.9% 23.4% 22.9% 33.1%

Likelihood of success 73% 71% 74% 81%

Downside risk fundinglevel 46% 48% 48% 48%

• We tested the contribution strategies for all four councils in 2016• Backdrop of lower funding levels than today, and equally pessimistic

outlook

27

Likelihood of achieving target in 2037, risk in 2037

2828

Contribution Modelling – 2018 Results

29

Model inputs – funding strategies

Rates as % of pay CWAC WBC HBC CE

1. Freeze (5y) 23.9% 23.4% 22.9% 33.1%

2. Step down (5y) Steps of -0.5% Steps of -0.5% Steps of -0.5% Steps of -1.0%

freezes/reductions

5 years

larger drops for Cheshire East

• After five years the rates are stabilised at +/-0.5%

• Rates floored at 15% and capped at 25% (35% for Cheshire East)

30

2018 results for “Step Down” scenarios

31

2018 outcomes

Rates as % of pay CWAC WBC HBC CE

Short term rates Decreases of 1%of pay for 3 years

Decreases of 1%of pay for 3 years

Decreases of 1%of pay for 3 years

Decreases of 1.5%of pay for 3 years

Long termstabilisationparameters

+/-1% of pay +/-1% of pay +/-1% of pay +/-1.5% of pay

• Results very positive, partly due to stronger funding positions than 2016• Outcomes agreed with fund officers and councils:

3232

Thank you

33

The material and charts included herewith are provided as background information forillustration purposes only. It is not a definitive analysis of the subjects covered, nor is it specificto circumstances of any person, scheme or organisation. It is not advice and should not berelied upon. It should not be released or otherwise disclosed to any third party without ourprior consent. Hymans Robertson LLP accepts no liability for errors or omissions or relianceupon any statement or opinion.

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