the london borough of merton pension fund actuarial update agm september 2012 alison hamilton ffa
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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?
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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?