Transcript Document

Hertfordshire Employer
Forum 2014
Welcome and Introduction
Councillor Derrick Ashley - Chairman of Pensions Committee
LGPS 2014, Technical Update & Auto
Enrolment
Mike Allen – Director of Pensions, LPFA
LGPS 2014
Summary of changes
Current scheme
New scheme
Scheme basis
Final Salary
CARE
Accrual rate
1/60th
1/49th
Indexation
CPI for DB’s and
pensioner’s
CPI on all
Normal Pension age
65
SPA
Earliest retirement
age
60
55
Employee
contributions
5.5% to 7.5%
5.5% to 12.5%
Contributions
flexibility
None
50:50
Pay used
Pensionable pay
Actual pay
Protection
85 year rule, pre
2008 service
Pre 2014, plus
underpin
LGPS 2014
4
Retirement age
Linked to SPA
SPA:
currently 65
66 by October 2020
67 by 2028*
68 by 2030*
*still waiting for pension act to be ratified
LGPS 2014
5
Contributions
Actual Pensionable pay
2014 New
Contribution
rate
Current rate (if full
time)
Up to £13,500
5.5%
5.5%
£13,501 to £21,000
5.8%
5.8, 5.9 or 6.5%
£21,001 to £34,000
6.5%
6.5%
£34,001 to £43,000
6.8%
6.8%
£43,001 to £60,000
8.5%
6.8 or 7.2%
£60,001 to £85,000
9.9%
7.2%
£85,001 to £100,000
10.5%
7.2 or 7.5%
£100,001 to £150,000
11.4%
7.5%
Greater than £150,000
12.5%
7.5%
LGPS 2014
*subject to
adjustment by
the treasury
6
Actual pay
•
For benefits accrued after 1/4/2014
•
And to calculate contributions rate to be paid
•
Overtime
•
Allowances
•
Possible lower contributions for part time employee’s
But
We will require 2 pay figures for a member leaving employment.
LGPS 2014
7
Protection for pre 2014
service
•
Pre 2008 service
•
2008 to 2014 service
•
Post 2014 service
LGPS 2014
8
Age 65 before 1 April 2022
•
All retirees within 10 years of age 65 at 31 March 2012
referred to as the ‘underpin guarantee’.
•
2 calculations to pay the better of
Old benefits
New benefits
•
•
LGPS 2014
9
For employers
•
Our online forms will be ready for 1st April 2014
•
Monthly returns
•
Online HR & Payroll guides
•
Employer Workshops
LGPS 2014
10
Key issues for employers
•
50/50 Scheme
• Recording of pay
• Automatic enrolment
•
Pay
• Part-time pay for setting contributions
• Non-contractual overtime included
• Separate pay figure needed for 2008 service
•
Assumed pensionable pay
• E.g. Pay reduced due to sickness, maternity, unpaid leave
• Assumed figure to be calculated and notified
LGPS 2014
11
Key issues for employers
•
Assumed pensionable pay
• Pay reduced due to sickness, maternity, unpaid leave
• Assumed figure to be calculated and notified
•
Breaks in membership/additional contributions
• Opportunity to ‘buy’ additional pension
• Cost can be shared by employer
•
End of Year returns
• Cumulative pay (in each section)
• Additional Contributions
• Final pay for 2008 Scheme
LGPS 2014
12
Triennial Valuation
Barry McKay – Hymans Robertson Actuary
Have I got (good) news for you!
Whole fund funding level has increased;
Deficit has decreased;
Contribution rates similar to 2010; but
There is variation across employers.
Typical LGPS fund – material increase in deficit!
14
Where we were and where we
are now
Financial assumptions
(All rates p.a.)
2010
2013
Discount Rate
6.1%
4.8%
Inflation (CPI)
3.3%
2.5%
Salary Increases
5.3%
3.8%
Net pre-retirement discount
rate
6.1% - 5.3%
= 0.8%
4.8% - 3.8%
= 1.0%
Net post-retirement
discount rate
6.1% - 3.3%
= 2.8%
4.8% - 2.5%
= 2.3%
16
We are living longer – but local variation
High life expectancy
Mid life expectancy
Low life expectancy
17
Whole fund valuation results
FL = 74.3%
FL = 82.5%
£4.0bn
£3.5bn
£615m
£3.0bn
£757m
£2.5bn
£2.0bn
£1.5bn
£1.0bn
£0.5bn
£0.0bn
Liabilities
Assets
2010
Liabilities
Assets
2013
18
What has happened since 2010?
Surplus / (deficit) at last valuation
(757)
Interest on surplus / (deficit)
(147)
Investment returns more than expected
207
Contributions greater than cost of accrual
91
Change in demographic assumptions
85
Change in financial assumptions
(253)
Other experience items
159
Surplus / (deficit) at this valuation
(1,000)
(615)
(800)
(600)
(400)
(200)
0
200
400
£m
19
Impact on contributions
30.0%
Past service contributions
25.0%
20.0%
15.0%
10.0%
Future service
contributions
5.0%
0.0%
2013
2010
20
New LGPS from 2014: funding impact
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
Vesting Period
3 months
2 years
Accrued rights protected (incl. retirement age, R85, final salary link)
Existing scheme underpin for members within 10 years of NPA (age 65)
at 1 April 2012 (“best of”)
Introduction of a “50/50” option to bolster LGPS participation
“Cap and collar” cost control
21
2014 scheme observed impact
Increased cost
Expected
saving?
Reduced cost
Source: Hymans Robertson – Typical County Council Fund
22
Typical employer results
Employer
Valuation date
A
B
C
2010
2013
2010
2013
2010
2013
(£m)
(£m)
(£m)
(£m)
(£m)
(£m)
Assets
1.44
1.94
12.3
18.2
6.6
10.2
Liabilities
2.26
2.73
15.0
20.5
6.9
9.7
Funding level
64%
71%
82%
89%
96%
106%
Surplus/(Deficit)
(0.82)
(0.79)
(2.7)
(2.3)
(0.3)
0.5
Certified rate
36.0%
37.2%
20.5%
20.5%
23.3%
21.2%
23
Summary and Conclusions
Summary and conclusions
Whole Fund funding level has increased from 74% to 82%
Deficit has decreased from £757m to £615m
Results affected by good returns, low yields, and lower
inflation
Contributions similar to 2010; but
Results vary across employers
25
Investment Review
Nick Sykes – Mercer Investment Consultancy
Agenda
• Economics and markets in 2013 – what really happened
• Hertfordshire Pension Fund’s performance for the year
• Evolving the Fund’s investment strategy
• Thoughts on 2014
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Review of 2013 – The UK Economy
Economic Growth (GDP)
Inflation (CPI)
Budget Deficit
Interest Rates (Bank
Rate)
Gilt Yields (10 Years)
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Expectations for 2013
as at December 2012
1.1%
Outturn as at January
2014
1.9%
2.5%
£107bn
£101bn
0.6%
0.5%
2.0%
2.8%
2.0%
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Review of 2013 – UK and Global Economies
UK
• After several years of economists’ forecasts of growth and inflation
being too optimistic, for 2013 they were too pessimistic, with end
outcome of c2% GDP growth (around trend) and 2% inflation (Bank of
England’s target)
• Interest rates flat at 0.5% but bond yields rose materially over the year
(good)
Global
• US economy firmly on recovery track, Japan also, Europe still sluggish
but peripheral countries have made material improvements
• Emerging markets now appear to be the cause for concern
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What is the outlook for 2014 – UK Economy?
Consensus Forecasts
UK
• GDP growth 2.6%
• CPI Inflation 2.3%
World
• GDP growth 3.1%
• CPI Inflation 3.0%
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Review of 2013 – Growth Assets
% Return for 2013
UK Equities
+20.8
Global Equities
+25.0
Emerging Market Equities
-4.1
UK Property
+10.9
Hedge Funds
+8.9
Commodities
-3.0
Gold
MERCER
-29.0
31
Review of 2013 – Bond Markets
• In 2011, gilt markets (both long-dated fixed and index-linked) returned
+26%
• In 2012 markets were flat, fixed interest gilts +2.7%, index-linked gilts
+0.6%
• In 2013 fixed interest gilts were down 5.9% and index-linked gilts up
2.2%
• Non-government bonds (‘corporate bonds’ or ‘credit’) produced flat
returns as spreads over government bonds narrowed but underlying gilt
yields rose
• High yield bonds did well, emerging market bonds performed poorly as
yields rose and currencies weakened.
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Review of 2013 – Property
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Review of 2013 – Winners and Losers
Greek stockmarket +52%
+410
%
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Turkish stockmarket -28%
-78%
34
Review of 2013 – Economies and Markets – Summary
• Economic outturn better than expected – recovery/growth in key
economies such as US, UK, Japan
• Monetary policy stimulus remained in place
– Interest rates close to zero
– Quantitative easing maintained (with a little tapering)
• Equity markets performed strongly on expectations of economic
recovery and profits growth, plus plentiful available liquidity
• Bond markets ‘rolled over’ as economic growth became more certain, to
be followed by reduced monetary stimulus eventually
• A better year for pension schemes as assets outperformed liabilities
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Hertfordshire Pension Fund Performance in 2013
• Estimated one year performance to 31/12/2013 +17.0%
• Strong positive returns from equities
• Property and private equity contributed
• Bond returns dull, credit better than government bonds
• Overall a strong year for Fund
– In absolute terms
– From the majority of the Fund’s managers relative to benchmarks
(Baillie Gifford, Jupiter and Allianz the stand-outs)
– Well ahead of the growth in liabilities
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Hertfordshire Pension Fund – Evolving the Fund’s Investment
Strategy
• Medium term plan is to reduce dependence upon equity returns and to
build a more diverse, less volatile, portfolio
• Alternatives manager LGT has been funded, in a series of tranches,
mainly from equities
• Property exposure, particularly outside the UK, has been increased
• The private equity portfolio has been reviewed in detail, the strategic
allocation is to be maintained, with new funds chosen for the Asian
region
• Timing and pace of switch from equities to bonds under careful
consideration
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Hertfordshire Pension Fund – Evolving the Fund’s Investment
Strategy
Developing the Bond Portfolio
Target
Historic
Fixed
Interest
Gilts
20%
IndexLinked
Gilts
20%
Henderso
n
'Absolute
Return'
20%
Legal &
General
Liabilitylike Bonds
40%
UK
Credit
40%
Global
Bonds
20%
Royal
London
'Core Plus'
40%
Total 35% of Fund assets
All managed by BlackRock
Total 16% of Fund assets
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Hertfordshire Pension Fund – Evolving the Fund’s Investment
Structure
UK Equities
UK Equity Market FTSE All-Share Index
• Broadly diversified index?
• Opportunities for UK growth
626 Constituents
• Under-researched stock-picking
potential
Top 10
Shares
37.5%
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Hertfordshire Pension Fund – Evolving the Fund’s Investment
Structure
UK Equities
UK Equity Market FTSE All-Share Index
,
62.5
Top 10
Share
s
37.5%
Top 10 Shares
Royal Dutch Shell A & B
6.62
HSBC
5.90
Vodafone
5.46
BP
4.31
GSK
3.71
BAT
2.89
Diageo
2.38
AstraZeneca
2.11
BG
2.09
Barclays
2.07
Total
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%
37.54
40
Hertfordshire Pension Fund – Evolving the Fund’s Investment
Structure
UK Equities
UK Equity Market FTSE All-Share Index
Next 10
Shares
15.8%
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Next 10 Shares
%
Rio Tinto
2.01
BHP Billiton
1.87
Lloyds
1.80
Prudential
1.62
Reckitt Benckiser
1.46
Glencore Xstrata
1.42
Unilever
1.42
BT
1.41
National Grid
1.39
SabMiller
1.39
Total
15.80
41
Hertfordshire Pension Fund – Evolving the Fund’s Investment
Structure
UK Equities
UK Equity Market FTSE All-Share Index
Revised Jupiter’s mandate to AllShare Index excluding top 20
stocks
Top 10
Shares
37.5%
• Focus on medium and smaller
size companies
• UK rather than ‘global’ companies
Next 10
Shares
15.8%
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• Growth and stock-picking
opportunities
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2014 – Looking Ahead
• Economies
– 2013 seems to have been the turning point – 2014 expected to be year of
recovering/strengthening economic growth
• Markets
– Tension between stronger economic fundamentals and reduced monetary
stimulus
– Growth assets expected to make further progress absent interest rate rises
or exogenous shocks
• Risks
– Systemic risks (Eurozone break-up, banks deleveraging, US fiscal drag have
faded from view
– Policy risk remains elevated (and volatility possible)
• Summary
– Scope for further gains from growth assets, but watch out for bumps in the
road
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Looking Further Ahead – Final Word
• “Baby-boom” with 2012 seeing more births than any year since 1972
• One third of babies born in 2013 expected to live to age 100
and… with Prince George arriving safely, we can now forecast the next
three monarchs:
King Charles III
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King William V
21 July 2015
King George VII
44
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45
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Hertfordshire Employer
Forum 2014