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Oxfordshire County Council Pension
Fund
2013 Actuarial Valuation
Employer Meeting
December 2013
Agenda
Purpose of the valuation
How do we do it?
Funding models and assumptions
Valuation Data
Results
Next Steps
2
Purpose of valuations
• Many questions!
Approach depends on question being
asked
• How much do employers 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)
• Have we enough assets to meet liabilities?
• How much risk do we leave on the table?
• Different approaches depending on employer situation
Cessation valuations
3
Triennial Funding Valuation
• to certify levels of employer contributions to secure the solvency of the Fund
Set 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
Different approaches possible for different
employer types
4
£0m
£20m
£40m
£60m
£80m
£100m
£120m
£140m
£160m
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Year
Total Fund CashflowsPensioners
Deferreds
Actives
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”
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How do we do it?
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
Calculations completed at
• Whole fund level
• At individual employer level to identify any outliers and for accountants!
But maybe pool similar employers to help with stability
• Price of stability is some cross subsidy
• Complete or partial risk sharing possible
6
Assumptions
Price Inflation (RPI)
• Usually difference between fixed interest and index linked gilts
• CPI adjustment required
Salary Increases
• Usually 1-2% pa more than price inflation
• Short term adjustment?
Discount rates
• Depends on purpose and objectives of valuation
Statistical assumptions
• Investigate past experience
• Use national data
• Adjust for actual experience
7
Assumptions – Inflation RPI
Spot inflation number was 3.60% and the smoothed number was 3.54%
8
Assumptions – Inflation (CPI)
• Formula effect and what’s in the basket
RPI usually more than
CPI
• 0.5% until 2010
• 0.8% since then Formula
effect
• Formula effect only
RPI and CPI “baskets”
expected to converge
• Consistent with CPI swap market
Assumed 0.8% less than RPI
9
Assumptions – Inflation (Pay)
Longer term
• 1% to 1.5% above RPI
Shorter term
• Closer to 1%
• Negative in recent years
Assumed RPI plus 1.0%
• Equivalent of CPI plus 1.8%
• Less than at 2010
Short term overlay
• CPI for next 2 years
10
Discount Rates
Choice of discount rate depends on the question being asked
Funding valuation
• What contributions are required to build up a fund of assets to meet pension liabilities for a given investment strategy?
Accounting valuation
• How much would a corporate body need to borrow to finance their pension liabilities?
Cessation valuation
• How much cash would we need to buy gilts to fund liabilities?
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Discount Rates
Ongoing funding valuation
• Expected future investment returns from actual investment strategy
Gilts and bonds – easy….
• Redemption yields
Equities – less easy….
• Fixed risk premium over gilts (Gilt + model)
• Economic model (BW model)
Property/alternatives – keep it simple
• Somewhere between equities and gilts
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Discount Rates / Equity Returns
Gilt Plus models
“Risk based” approach based on alleged tPR approach
• Doesn’t apply to LGPS!
Value liabilities on minimum risk gilts basis
• Increase risk factor via fixed risk premium
• Discount rate then gilts plus something
• Based on asset strategy and employer covenant
• Seems quite sensible and nice and simple
But liability values then behave like gilts
• Potential for lots of volatility
• Equities and gilts not well correlated especially in short term
Problems with quantitative easing
• BoE making pensions “more expensive”
• Government taking an interest
13
Discount Rates / Equity Returns
Our economic model
• Been using and developing for 15 years
• Specifically designed for LGPS
Assumes equity returns function of
• Dividend income plus
• Economic/dividend growth
Returns then risk adjusted
• If more than 75% in equities
• Minimum and maximum real discount rates as well
Valuation results assessed over 6 month period spanning valuation date
• Essentially some smoothing
• Helps meet stability objective
More complex model
• But more robust and stable valuation results
14
Change in Employer Contribution
15
10%
15%
20%
25%
30%
35%Change in Average Employer Contribution
Gilt Based Discount Rate Economic Discount Rate
Gilt and Bond Returns
16
Spot Yield
3.14%
Smoothed Yield
3.27%
Spot Yield
4.03%
Smoothed Yield
4.08%
Equity Returns
17
Spot Yield
3.35%
Smoothed Yield
3.38%
Average of 1% more than RPI pa
Central Assumption of 0% over RPI
Equity Return (Central Assumption)
3.38% + 0.0% + 3.54%= 6.92%
Discount Rates – comparison with
FRS17/IAS19
Accounting Valuations
• Meet requirements of accounting standards IAS19/FRS17
• Discount rate adopted is yield on a high quality corporate bond
Typically lower than ongoing funding valuation discount rate
• Higher total liability for accounting valuations
Comparison with ongoing/accounting valuation
• Expect accounting valuation deficit to be greater than ongoing valuation deficit
New academies
• Deficit shown in our initial academy report based on ongoing valuation assumptions
• Discount rate used is 2010 ongoing funding valuation discount rate updated to reflect market conditions at date of conversion
• Initial academy report deficit generally lower than disclosed FRS17/IAS19 deficit at date of conversion
Financial Assumptions - Summary
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31 March 2013 31 March 2010
Central Assumptions %pa %pa
6.9% 7.3%
3.3% 4.5%
Bond type investments 3.9% 5.6%
6.0% 5.6%
31 March 2013 31 March 2010
%pa %pa
5.8% 6.7%
Pay Increases Long term 4.5% 5.0%
Short term 2.7% 0% for those over £21,000
3.5% 3.5%
Pension Increases 2.7% 3.0%
Smoothed Investment Returns
Equity type investments
Property type investments
Financial Assumptions
Central Discount Rate
Retail Price Inflation
Gilt type investments
Statistical Assumptions
20
Pre retirement Based on LGPS experience
Post Retirement
mortality
SAPS 1 Tables
Fund specific rating
110%
1.5% pa improvement
factor
Valuation Data - Liabilities
21
Key Stats
Number of Members 2013 % 2010 %
Actives 17,811 33% 17,916 37% 45.3 63.0
Deferred Members 23,306 44% 20,710 42% 44.8 62.6
Pensioners 12,249 23% 10,156 21% 70.1
Total Members 53,366 100% 48,782 100%
£ (000) £ (000) % Change
Actives 291,380 303,539 (4%)
Pensioners 55,885 41,967 33%
£ £ % Change
Actives 16,360 16,942 (3%)
Pensioners 4,562 4,132 10%
Average Age
Average
Retirement Age
This Valuation
Actual Pay/Pensions
Average Pay/Pensions
FT Males
31%
FT Females30%
PT Males
4%
PT Females
35%
Pensionable Pay at This Valuation
Year to March 2013 March 2012 March 2011 TOTAL
£ (000) £ (000) £ (000) £ (000)
UK Equities 552,192 Expenditure Retirement Pensions 52,673 47,949 43,812 144,434
Overseas Equities 500,094 Retirement Lump Sums 11,593 18,513 13,034 43,140
Death Benefits 1,580 1,685 2,028 5,293
UK Gilts 143,913 Leavers benefits 4,215 6,132 6,118 16,465
Corporate Bonds 58,604 Expenses 1,438 4,108 1,509 7,055
Overseas Bonds 29,564 Other Expenditure - - - -
Property 86,589 Total Outgo 71,499 78,387 66,501 216,387
Infrastructure - Income Employees Ctbns 18,671 19,169 20,180 58,020
Commodities - Employers Ctbns 59,735 83,286 65,940 208,961
Other assets 78,330 Transfer Values 5,769 6,725 7,293 19,787
Cash 74,462 Other Income 528 - - 528
Investment Income 14,700 19,514 19,726 53,940
Total 1,523,748 Total income 99,403 128,694 113,139 341,236
New money for investment 13,204 30,793 26,912 70,909
Fund Value
Assets at Start of Year 1,319,994 1,248,106 1,115,415 1,115,415
Cashflow 27,936 50,354 46,800 125,090
Change in value 175,818 21,534 85,891 283,243
Assets at End of Year 1,523,748 1,319,994 1,248,106 1,523,748
Annual Returns
Approx Rate of Return (per annum) 14.4% 3.3% 9.4% 8.9%
Assets at This Valuation £(000)
Revenue
Accounts
Global Equities
69%
Gilts and Bonds
15%
Cash5%
Other11%
Assets and Fund Accounts
22
Intervaluation Experience
23
Intervaluation Experience
Actual Expected
Investment Return 8.9% pa 6.7% pa
Pay Increases** 1.2% pa 2.5% pa
Pension Increases 3.5% pa 3.0% pa
Deaths 844 789
Pension Ceasing £3,319k £3,796k
** includes short term overlay
Valuation Results – Whole Fund
24
Last Valuation This valuation 10% 50/50
Funding Level 79% 82% 82%
Ongoing Cost 14.4% 15.1% 14.1%
Total Rate - 25years
19.0% 20.3% 19.3%
10%
15%
20%
25%
30%
35%
40%
45%
50%
50%
55%
60%
65%
70%
75%
80%
85%
90%
% of PayFunding Level Valuation Results
Individual Employer Results
Based on 2013 payroll, total cash amount increase 1% on average
Mainly due to decrease in discount rate
Size of increase depends on:
• Average age
• Reductions in payroll
• Outsourcings, other new employers
• If 2010 contribution rates were stepped
• If 2010 deficit recovery contribution rates expressed as % payroll or cash amounts
• Experience
• Funding position at 2010
No employer is average
Next Steps
Agree contributions
Final report