The London Borough of Merton Pension Fund

Actuarial update

AGM September 2012

Alison Hamilton FFA

Agenda

2

Lord Hutton’s Recommendations

3

LGPS 2014 – the headlines

4

Public Service Scheme ProposalsScheme Accrual

RateRevaluation Notes

2 November Reference Scheme

60ths Average Earnings

From 2015Average 3.2% member

contribution increase phased in from 2012 to 2015

Civil Service 44ths CPI

Teachers 57ths CPI + 1.6%

Health Service 54ths CPI + 1.5%

LGPS 49ths CPI From 2014Average member contribution the same but higher paid to pay more

“50/50” option

5

Trade accrual and revaluation for same cost (ish)Not quite there yet

Why CARE?

Scheme Design Principles

7

Replacement Ratios

8

Income Replacement Ratios

9

Replacement ratios

10

CARE Schemes

11

How it works

Year SalaryPension

Pot at Start %Pension Earned

Pension Pot at End "Interest"

Total Pension % Salary

1 £20,000 £0 pa 2%

2

3

4

5

 

10

 

20

Accrual 2% (1/50th)Pay Increases 3%Revaluation 3%

12

How it works

Year SalaryPension

Pot at Start %Pension Earned

Pension Pot at End "Interest"

Total Pension % Salary

1 £20,000 £0 pa 2% £400 £400 pa £12 £412 pa 2%

2

3

4

5

 

10

 

20

13

Accrual 2% (1/50th)Pay Increases 3%Revaluation 3%

How it works

Year SalaryPension

Pot at Start %Pension Earned

Pension Pot at End "Interest"

Total Pension % Salary

1 £20,000 £0 pa 2% £400 £400 pa £12 £412 pa 2%

2 £20,600 £412 pa

3

4

5

 

10

 

20

14

Accrual 2% (1/50th)Pay Increases 3%Revaluation 3%

How it works

Year SalaryPension

Pot at Start %Pension Earned

Pension Pot at End "Interest"

Total Pension % Salary

1 £20,000 £0 pa 2% £400 £400 pa £12 £412 pa 2%

2 £20,600 £412 pa 2% £412 £824 pa £25 £849 pa 4%

3 £21,200 £849 pa 2% £424 £1,273 pa £38 £1,311 pa 6%

4 £21,800 £1,311 pa 2% £436 £1,747 pa £52 £1,799 pa 8%

5 £22,500 £1,799 pa 2% £450 £2,249 pa £67 £2,317 pa 10%

                 

10 £26,100 £4,695 pa 2% £522 £5,217 pa £157 £5,374 pa 20%

                 

20 £35,100 £13,330 pa 2% £702 £14,032 pa £421 £14,453 pa 40%

15

Accrual 2% (1/50th)Pay Increases 3%Revaluation 3%

A final salary scheme is a CARE Scheme with actual salary increase revaluation

Why Career Average?High Fliers -v- Low Fliers

16

5 10 15 20 30 40Final Salary 8% 17% 25% 33% 50% 67%Low Flier 9% 18% 28% 39% 63% 91%High Flier 8% 15% 22% 29% 40% 50%

0%

20%

40%

60%

80%

100%

Years of Membership

Replacement Ratios - 1.67% (60ths) AccrualEarning Revaluation

High flier pay increases - 3% per annum more than low flier

Is the new LGPS better for me?

17

5 10 15 20 30 40CARE 10% 19% 27% 35% 49% 61%Final Salary 8% 17% 25% 33% 50% 67%Relative 117% 113% 109% 106% 99% 92%

0%

20%

40%

60%

80%

100%

120%

140%

0%

20%

40%

60%

80%

100%

Years of Membership

Replacement Ratios - 1/60ths Earnings -v- 1/49ths CPIMr Average Flier

Replacement Ratio Relative

Pay increases assumed to be 1.5% more than CPI

Is the new LGPS better for me?

18

5 10 15 20 30 40CARE 10% 19% 28% 37% 53% 67%Final Salary 8% 17% 25% 33% 50% 67%Relative 119% 116% 113% 111% 106% 101%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

0%

20%

40%

60%

80%

100%

Years of Membership

Replacement Ratios - 1/60ths Earnings -v- 1/49ths CPIMr Low Flier

Replacement Ratio Relative

Pay increases assumed to be 1.0% more than CPI

Is the new LGPS better for me?

19

5 10 15 20 30 40CARE 9% 18% 25% 32% 43% 52%Final Salary 8% 17% 25% 33% 50% 67%Relative 114% 108% 102% 96% 86% 78%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

0%

20%

40%

60%

80%

100%

Years of Membership

Replacement Ratios - 1/60ths Earnings -v- 1/49ths CPIMrs High Flier

Replacement Ratio Relative

Pay increases assumed to be 2.5% more than CPI

Conclusions

20

Impact on Merton Pension Fund

• We can do the calculations• 1-2% of payroll

• The benefits cost roughly the same• The link to SPA reduces the over all cost

• Depends on membership profile and funding assumptions

• Above excludes any benefit of “50/50” lite option• Employer cost roughly halves for those who opt for

50/50• If 10% of payroll opt for “50/50”

• Further saving of c. 0.5% for the Fund• Variation between employers within Funds

21

What about the past?

22

Assumptions 2010 Valuation Current updateMarch 2010 September 2012

CPI Inflation 3.0% 2.2%Discount Rate 6.5% 5.8%Salary Increases 5.0% 4.2%Pension Increases 3.0% 3.0%

Balance Sheet 2010 Valuation Current update£ m £ m

Liabilities 411 456Assets 344 399Surplus/Deficit (67) (57)Funding Level 84% 88%

Ongoing contribution rate 14.1% 13.8%Deficit recovery amount 7.3% 5.5%Total 21.4% 19.3%

Summary

• The 2013 valuation is just around the corner• Benefits built up to date are the same• New contribution rates may reduce slightly

• For future benefits

• For employers

• Not employees

• Still a deficit to fund

• Still some decisions to be agreed for 2014 scheme

23

Questions?