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Suffolk County Council Pension Fund

Employer Forum

• Jamie Clark

• 25 July 2012

2

Today’s discussion

Funding update

Where are we now?

Look ahead to 2013 valuation

LGPS reforms

New scheme design

Financial impact of reforms

LGPS participation

Opt-outs

Auto-enrolment

Funding update

4

Actuarial valuation

Funding position

Liabilities

Assets

Funding level (100% = “fully funded”)

Contribution rate

Future Service Rate (benefits earned in future)

Deficit contribution (benefits earned in past)

Formal valuation every 3 years – next one due 2013

5

2010 valuation position

This is whole fund – individual employer positions vary

Past Service Position (£m)Past Service Liabilities 1721Market Value of Assets 1415Surplus / (Deficit) (306)

Funding Level 82%

Contribution Rates (% of pay)Future Service Rate 16.6%Past Service Adjustment (20 year spread) 5.6%Total (Common) Contribution Rate 22.3%

6

Key factors that influence the valuation

Market conditions

Life expectancy

Contributions in / benefits out

Salary increases

Membership profile

Changes to the scheme

Full picture will emerge at 2013 valuation

7

Market movements since 2010

8

Effect of market movements since 2010

Expected Actual Expected Actual

Assets Liabilities

Adverse markets = a double whammy for the Fund

9

Funding level (whole fund)

82%

71%

45%

55%

65%

75%

85%

95%

31 March 2010 31 March 2012

(£306m)

March 2010 June 2012

82%

Fun

ding

Lev

el

71%

(£668m)

10

Outlook for 2013

Compared to 2010 valuation:

Funding levels likely to be lower

Deficits likely to be bigger

(Theoretical) contribution rates likely to be higher

Results will vary between employers

Today’s update an estimate….full picture in 2013

11

What’s in the mix for 2013 valuation?

Suffolk 2013 valuation

LGPS reform

13

Hutton’s main recommendations

Keep “Defined Benefits”

Protect accrued rights

New CARE scheme for future accrual

Revalue in line with earnings

Link NRA to SPA

Fixed cost ceiling

Government set “reference scheme”

14

New LGPS from 2014

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

Accrued rights protected (NRA, Rule of 85, final salary link)

Protection for members within 10yrs of NRA at 1 April 2012

New “50/50” option to bolster LGPS participation

15

Financial impact on LGPS employers

Taken in isolation...

No impact on existing deficits (past service)Accrued rights to 2014 are protected

Modest savings on new benefits (future service)c1.5%-2% of pay across whole fund

Savings will vary by employer:Depends on membership profile

Changes to member contributions

Take up of “50/50” option

BUT cannot take in isolation!

16

Impact on members

No change to accrued rights

Protection for members within 10yrs of NRA at 1 April 2012

All pension taken at same retirement age

CARE more/less favourable to certain members

Higher accrual rate (1/49th) / lower revaluation rate

Bakes in more guarantee

Favours those closer to retirement

Better in some economic circumstances

There will be winners and losers

17

What still lies ahead...

Consultation on new scheme

New scheme details to be thrashed out:Cost management mechanism (cap and collar)

Hutton governance recommendations

Implementation / administration

Communication with members

.....all within a very challenging timescale!

LGPS participation

19

Potential impact of LGPS opt-outs

Issues for any member opting out:

Less security, greater State dependency

Lose employer contributions and other benefits

Issues for the pension fund:

Possible threat to sustainability in long term

Possible cashflow / investment issues in short term

What will help reduce LGPS opt-outs?

New scheme “50/50” option

Communication: members understanding value of their pensions

20

Auto-enrolment – what is it?

Encouraging greater pension provision

Auto-enrol members into a “qualifying scheme”

LGPS is a qualifying scheme

Minimum contribution levels

Various key “staging dates”

Policeman is The Pensions Regulator

Responsibility lies with employers

21

Auto-Enrolment (simplified!) New starts

Opt-outs

Suffolk LGPS

Existing

A/E

A/E

22

Implementing Auto-Enrolment

Staging datesEligible

jobholders

MonitoringCommunications

Contributions HR/Payroll Penalties

Early planning essential!

23

Summary

Funding update

Likely outlook - higher deficits and contribution rates....

....but won’t know full picture until 2013 valuation

LGPS reform

New scheme from 2014

No impact on current deficits

Unlikely to mean lower contribution rates at 2013

LGPS participation

Opt-outs in no-one’s interests

Auto-enrolment on the horizon – employer responsible

Early planning for A/E is vital

Thank you

Any questions?

Appendix

26

How CARE works

For example, Tom earns £20,000,

so his pension in year 1 is worked out as:£20,000 x 1/49th =

£408

The £408 that Tom earns in year 1 is revalued at the end of the next year. So at the end of year 2, this

part of Tom's pension is £408 x 1.04 = £424.

Maintaining your pension’s

value

Revalued by 4% each year

Year 1 retirement pension Tom's pension for year 1 is £860

after 20 years' service.

The pension continues

to be revalued until you retire

27

Your pension at retirement

Annual pension at retirement If Tom has a 4% salary rise each year, by adding all of the

other years' pension pots together, he could expect a pension of £17,200 a year after 20 years' service.

You receive a new pension ‘pot’ for

each year you are a member

Add up the pension you earned each year (after it has been revalued) to

find your total pension

Adding your other years’ pension pots.

28

Valuation timetableEarly 2013:

Pre-valuation meetings to discuss valuation process

Summer 2013:

All data requirements provided to actuary

Data validated and declared “fit for purpose”

Autumn 2013:

Initial valuation results – whole fund

Meetings to agree final valuation assumptions

Final valuation results – individual employers

Winter 2013:

Agreement on final contribution rates for employers

By 31 March 2014:

Final valuation report (including Rates & Adjustments certificate)

29

AE: categorising workers

Non-eligible job holders

Entitled workers

Non-eligible job holders

Non-eligible job holders

75

SPA

22

16

£5,564Lower earnings

threshold

£8,105 Earnings

trigger

£42,475Upper earnings

threshold

Age

Earnings

Opt-in to a scheme (LGPS)

Opt-in to Qualifying Scheme (LGPS)

Auto-enrol to Qualifying Scheme (LGPS)

Qualifying Earnings

Eligible job holders

30

BIG money penalties for non compliance

Fixed penalty notice of £400

Prohibitive recruitment noticeBased on number of workers – but in total no more than £50,000

Escalating penalty notice£50 to £2.500 per day for less than 250 workers

£5,000 per day for 250 plus workers

£10,000 per day for 500 or more workers

31

New public sector scheme designs

Civil Service NHS Teachers LGPS

1/43 1/54 1/57 1/49

CPI CPI + 1.5% pa CPI + 1.6% pa CPI

Option to pay extra to retire 3

years before SPA

Same plus one-off “choice” for

protected members

Same plus higher conts for higher accrual

No rise in average conts, new “50/50”

option

Reference Scheme

CARE

SPA

1/60 + ave earnings

3.2% on contributions*

Uniformity sacrificed*Except LGPS

32

Will these reforms last 25 years*?

Possible spanners in the works...

Taxpayer savings don’t materialise

SPA not keeping up with life expectancy

Cost management (caps/collars etc) ineffective

Envy (continuing decline in private sector pensions)

Economy underperforming over long term

Politics (either lack of will or too much interference)

* Rt Hon Danny Alexander MP, November 2011