hertfordshire county council pension fund

Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

Hertfordshire County Council Pension Fund

The search for stable contributions

• Bryan Chalmers, FFA

• Barry McKay, FFA

• 23 March 2010

2

What we’ll cover today

1. Basics

2. Funding update

3. Stability

4. Individual employers

3

What is the plan for the 2010 Valuation?

There is a lot of work for the administration team

Event Responsibility Timescale

Provision of data Fund End of July 2010

Membership data queries submitted Hymans Mid August 2010

Membership data queries returned Fund End of August 2010

Clean data sign-off Hymans 31 August 2010

Valuation calculations Hymans End of October 2010

Provision and discussion of initial results Fund November 2010

Finalisation of employer results and setting of

contribution rates Hymans / Fund End of December 2010

Final valuation report and rates & a djustments

certificate issued Hymans By 31 March 2011

1. Basics

2. Funding update

3. Stability


4

Data submission for 2010

Rely on accuracy of membership data

Administering Authority require information from employers

Changes in membership

Correct salaries/contributions paid

Missing/incorrect data could result in:A higher value being placed on liabilities

A higher contribution rate

1. Basics

2. Funding update

3. Stability


5

Promise now, pay later

Lump Sum

Dependant’s Pension

Member’s Pension

40 65 85

Recruitment

Contributions

Exp

en

ditu

reIn

com

e

Retirement Death

1. Basics

2. Funding update

3. Stability


6

Future cashflows1. Basics

2. Funding update

3. Stability


7

Why do we do a valuation?

We have to

Recommend employer contribution rates

Assess how well pension promises are covered?

Monitor experience vs. assumptions

1. Basics

2. Funding update

3. Stability


8

Assumptions

Financial Assumptions

• Investment return/ Discount rate

• Inflation

• Pay increases

• Pension increases

Consider:

• Economic outlook

• Actual Scheme assets

• Historical real pay growth

Demographic Assumptions

• Life expectancy

• Member Options

• Withdrawals

• Marriage statistics

Consider:

• Population trends

• Members’ social status

• Past Scheme experience

Amounts paid: Probability of payment :

1. Basics

2. Funding update

3. Stability


9

We are living longer – but local variation

High life expectancy

Mid life expectancy

Low life expectancy

1. Basics

2. Funding update

3. Stability


10

Current funding level1. Basics

2. Funding update

3. Stability


11

Funding plan at 31 March 2007

“

£3.6bn

£4.8bn

Self-sufficient

£3,212m

Assets

£2,152m

Future excess returns£672m

(1) i.e. returns in excess of return on gilts

(1)

Deficit conts£388m

(2)

(2) Present value of deficit recovery payments over 20 years

1. Basics

2. Funding update

3. Stability


12

Since the valuation

Self-sufficient

£4,116m

Assets£2,226m

Deficit conts£388m

11 March 2010

£830m

How can we fill this gap?

1. Basics

2. Funding update

3. Stability


13

How do we cope? - traditional valuation approach

Funding Level100%

2007 2010 2027 2030Year

1. Basics

2. Funding update

3. Stability


14

Allowing for future returns

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Annual WM local authority return 1997 to 2008

Annual return

1. Basics

2. Funding update

3. Stability


15

0

50

100

150

200

250

300

Pro

ject

ed

Fu

nd

ing

Le

vel

Time

median

Worst outcomes

Best outcomes

1%

95%

84%

16%

5%

99%

A range of potential long term outcomes

5,000 simulations of the future

Rank from worst to best outcome to give distribution of possible outcomes

1. Basics

2. Funding update

3. Stability


16

Can we rely on investment returns if we have long term secure covenant?

Median

... but must understand the risksSource: Hymans Robertson, comPASS, Hertfordshire County Council Pension Fund

16%5%1%

1. Basics

2. Funding update

3. Stability


17

For long term secure employers only...

Limit increases and future decreases (+1 and -1% p.a.) without harming expected long term funding level

Underpay in bad times, overpay in more favourable conditions

More affordable contributions,greater budgeting certainty

1. Basics

2. Funding update

3. Stability


18

Benefits of risk based valuation

Understand Fund dynamic

Early warning system

Better Governance/More Transparency

Employer specific analysis

Support for change

1. Basics

2. Funding update

3. Stability


19

Less secure & shorter-term employers

Challenge: protect the fund

avoid pushing employers into insolvency

Reconsider deficit recovery

Seek additional security

Understand the risks

Assess the likelihood of meeting target funding

1. Basics

2. Funding update

3. Stability


20

What is target funding level by next valuation?

What is probability will be on track in 3 years?

X

2010 2013 2017End of contract term

Fun

ding

Lev

el

100%

80%

65%

X

1. Basics

2. Funding update

3. Stability


21

Well-funded stable employer 1. Basics

2. Funding update

3. Stability


Funding level = 88%Current rate = 16%Theoretical rate = 22%Restricted rate = 19%

81%

84%

0% 20% 40% 60% 80% 100% 120%

Restricted contribution rate

Theoretical contribution rate

Probability of being 90% funded after 3 years

71%

73%

0% 20% 40% 60% 80% 100% 120%



Average funding level for worst 10% of scenarios after 3 years

22

Poorly funded employer 1. Basics

2. Funding update

3. Stability


Funding level = 60%Current rate = 20%Theoretical rate = 30%Restricted rate = 24%

46%

66%

0% 20% 40% 60% 80% 100% 120%



Probability of being 58% funded after 3 years

36%

42%

0% 20% 40% 60% 80% 100% 120%



Average funding level for worst 10% of scenarios after 3 years

23

Conclusions and next steps

For long term secure employersIncreases in contributions required

But can stabilise increases

Without any long term damage to the Fund

Underpay in bad times, overpay in more favourable conditions

For other employersIncreases in contributions inevitable

Dialogue with AA is essential

Risk assessment to test likelihood of meeting target funding

Based on evidence of security

1. Basics

2. Funding update

3. Stability


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hertfordshire county council pension fund

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