london borough of hounslow pension fund...london borough of hounslow pension fund 2016 whole fund...

London Borough of Hounslow Pension

Fund

Actuarial Update16 January 2019

Graeme Muir FFA, Partner

Melanie Durrant FIA, Associate

Agenda• Actuarial valuation recap

• The current position

• The future outlook

Actuarial valuation

A recap

LONDON BOROUGH OF HOUNSLOW PENSION FUND

Valuations - recap

•Accumulation of

contributions and

investment returns

less benefits paid

Assets

•How much are they

worth?

Valuation

4

•Future benefits paid

from the Fund

(pensions, lump sums,

transfer values)

Liabilities

•How much do we need

now to pay future

benefits? (Contribution

rate)

Valuation

Value of liabilities less value of

assetsDeficit

Value of assets / value of

liabilitiesFunding Level


Filling the gap

5

Consistent, strong investment returns

Cash contributions


Triennial valuations – why do we do them

• to certify levels of employer contributions to secure

the solvency of the Fund and the long term cost

efficiency of the Scheme

Set out in LGPS

Regulations

• As determined by administering authority

• With some actuarial help!

Have regard to the

Funding Strategy

Statement

• Function of funding model / investment strategy

• Spreading and stepping

Stability of

contributions

• Statutory/non statutory bodies

• Open or closed admission agreements

• Look at employer financial strength (“covenant”)

Employer-specific

approaches

6


Triennial valuation - what do we do

7

Assess long term financial risks

Cost of benefit promises not known in advance

Estimate and value future benefit payments

Need to apply many different assumptions


Valuing employer assets

Begin with assets at start of period

Increased by contributions paid in

Reduced by benefits paid out

With an additional gain or loss from Fund investment returns

8


Valuing employer liabilities

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 present day value based on

Fund’s long term strategy

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£4.1bn

£1.3bn

£0m

£10m

£20m

£30m

£40m

£50m

£60m

£70m

0 10 20 30 40 50 60 70 80 90

Year

Fund cashflows

Projected

Discounted£3.0bn

£0.9bn


Our key assumptions

Financial

Discount

rate

Salary

increases

Pension

increases

(CPI)

10

Demographic

Mortality

RetirementCommutation


Discount rates – BW economic model

11

• Weighted expected future

investment returns from long-

term investment strategy (top

down approach)

• Assumptions assessed over six

month period spanning

valuation date (smoothed)

• Specifically designed for LGPS

• Smoothed returns help stability

16%

70%

5%

5%

4%

Long term investment strategy at 2016 valuation

Bonds

Equities

Property

Gilts

Absolute return fund


Triennial valuations – What’s the key outcome?

Future service contribution rate / Primary rate

• Cost of next year’s pension earned

• Employer’s share of cost

Past service contribution rate / Secondary rate

• Adjustment to primary rate to get the required employer

rate

• Contribution towards deficit Cash sum or % of pay

12

Where were we at

2016 and the outlook

for 2019?


2016 Whole Fund results

Funding level• Deficit of £144m ~ 84% funded

• Assets of £772m

Average employer contribution rate• 21.0% p.a. made up of

• an average primary rate of 13.9% p.a. of pensionable pay

• plus an average secondary rate of 7.1% p.a. (17 year recovery period)

14


Assets

15

90

100

110

120

130

140

150

160

% g

row

th s

ince

20

16

val

uat

ion

Assets

Asset projection based on 2016 valuation assumption

Equities

Gilts

Property

Other Bonds

Actual assets


Inflation

16

2.3%

2.4%

2.5%

2.6%

2.7%

2.8%

2.9%

Inflation


Current funding position

17

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

Funding Level

Unsmoothed Smoothed


So……..

Strong asset returns since 2016

• Great if you held the assets at 2016

• Not so great if you still have some to buy…

Lower real returns going forward

• Offsets some of the asset outperformance to date

• Still need to buy new assets for new liabilities

• More expensive than before so more cash required

• Current market uncertainty may create a need for further

prudence in the assumptions

18


Longevity experience

19

20

21

22

23

24

25

26

27

28

Male at 65 now Female at 65 now Male at 65 in 20 years Female at 65 in 20 years

Life expectancies

2016 mortality Latest mortality


What does 2019 look like?

• Where are we now? 2019 looking generally positive

• Funding level at September 2018 estimated to be 94% on 2016

assumptions, increase of 10%

• We live in an uncertain world

• Are assets defying gravity?

• Risk of short term shocks and volatility

• BW adopts longer term model designed to help withstand short term “noise”

• Aiming for stability of contributions

20

• LGPS Funds can still take

the long term view

Key

takeaway


Any questions?

21


Regulatory information

• The information in this presentation is based on our understanding of current taxation law,

proposed legislation and HM Revenue & Customs practice, which may be subject to future

variation.

• This presentation is not intended to provide and must not be construed as regulated investment

advice. Returns are not guaranteed and the value of investments may go down as well as up.

• Barnett Waddingham LLP is a limited liability partnership registered in England and Wales.

• Registered Number OC307678.

• Registered Office: 2 London Wall Place, London EC2Y 5AU

• Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority and is

licensed by the Institute and Faculty of Actuaries for a range of investment business activities.

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