Hampshire Pension Fund
Annual Employers Meeting
23 October 2015
Fire Alarms
• Should fire alarms sound, please make your
way back to the Main Entrance and exit
onto Sussex Street
• Turn left and walk to the end of Sussex
Street, cross the road and go past the
white barrier to the Assembly Point, which
is outside the Great Hall on Castle Avenue
Hampshire Pension Fund
Annual Employers Meeting
23 October 2015
Welcome
Councillor
Mark Kemp-Gee
Chairman, Pension
Fund Panel & Board
Today’s programme
10:00
Chairman of the Pension Fund Panel & Board – Cllr Mark
Kemp-Gee
10:10
Annual Report for 2014/15 – Carolyn Williamson
10:20
2014/15 Accounts and Fund Performance – Andrew Boutflower
10:30
Economic and market outlook – Carolan Dobson
10:40
Update from the Fund Actuary – Funding Update – Joel Duckham
11:20
Coffee Break
11:35
Pensions Administration update – Nick Weaver
11:45
Update from the Fund Actuary – Employer Considerations– Alison
Murray
12:30
General question and answer session
12:45
Close
Hampshire Pension Fund
Annual Report for
2014/15
Carolyn
Williamson
Director of Corporate
Resources
Annual report for 2014/15
Part of the Pension Fund’s communication strategy with
Fund employers, alongside:

this Annual Employers Meeting

the Employer’s Guide

employer training and liaison meetings

the website at www.hants.gov.uk/pensions
Available electronically on the Pension Fund’s website
We would like your comments please on the Annual
Report and this Annual Meeting
Annual report for 2014/15 - Contents
Investment returns in 2014/15
Accounts for 2014/15
Membership report
Statutory statements – revised and updated
New for 2014/15 based on updated guidance
•
more detail on the Panel and their training
and development
•
greater focus on risk management
Does the Annual Report meet your needs?
At 31 March 2015 - 6.3% more scheme
members
60,000
50,000
40,000
Contributors
30,000
Pensioners
Deferreds
20,000
10,000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Number of contributors by employer
31 March 2015
Key issues in the last 12 months






Continuation of auto-enrolment for employers
Implementing the new Pensions Administration systemUPM
Applying the Fund’s new Investment Strategy – starting
to retender investment management contracts
Retendering the contract for the Pension Fund’s actuary
– Aon Hewitt reappointed
Responding to further Government consultations on
Cost Savings and Governance
Applying for DCLG approval for a Joint Pension Fund
Panel & Board – conditional approval granted
Current challenges





Continuing to monitor investment manager
performance, taking a phased approach to the
retendering of contracts
Bedding in the new UPM system
Responding to the Government’s proposals for
pooling investments
Preparation for the 2016 actuarial valuation
Responding to scheme member investment
queries e.g. investments in fossil fuels
Pension Fund Panel & Board
Pension Fund Panel & Board
• Important to give employers and scheme members
input to key Pension Fund decision making (different to
many other funds)
• Single committee should be more efficient and effective
• Try to ensure fair representation – new opportunities
for deferred scheme member and non-Local Authority
employer
• Closing date for applications for new roles is 6
November, details are on the Pension Fund website
• Government approval is conditional on us reporting
back next year – please let us have your feedback
2014/15 Annual Report
Any questions?
Hampshire Pension Fund
2014/15 Accounts and
Fund Performance
Andrew Boutflower
Deputy Investments and
Borrowing Manager
Accounts 2014/15 The main questions
Q. What’s happened to the value of the
Fund?
A. Now over £5bn, grew by 13.2%
Q. Has the fund maintained a positive
cashflow?
A. Yes, a small one.
Total value of the Pension Fund
from 2009 to 2015
At 31 March
2009
2010
2011
2012
2013
2014
2015
Value (£m) Change (£) Change (%)
2,396
3,238
3,558
3,777
4,341
4,536
5,137
-552
842
320
219
564
195
601
-18.7%
+35.1%
+9.9%
+6.1%
+14.9%
+4.5%
+13.2%
Hampshire Pension Fund now £4,860m
at 30 September 2015
£m
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Fund income and expenditure
2014/15
Contributions received
Pensions paid
Lump sums paid
Net transfers in/out *
£m
237
-174
-43
-78
Management costs **
-20
Investment income (net of tax)
Net Surplus
* Includes £74.7m bulk transfer out
** Change in CIPFA guidance
94
16
+6.5%
+4.5%
+15.1%
+4.8%
-83.1%
Fund income and expenditure
2014/15
Contributions received
Pensions paid
Lump sums paid
Net transfers in/out *
£m
237
-174
-43
-78
Management costs **
-20
Investment income (net of tax)
Net Surplus
* Includes £74.7m bulk transfer out
** Change in CIPFA guidance
94
16
+6.5%
+4.5%
+15.1%
+4.8%
-83.1%
Fund income and expenditure
2014/15
Contributions received
Pensions paid
Lump sums paid
Net transfers in/out *
Management costs **
Investment income (net of tax)
Net Surplus
* Includes £74.7m bulk transfer out
** Change in CIPFA guidance
£m
237
-174
-43
-78
+6.5%
+4.5%
+15.1%
-20
94
16
+4.8%
-83.1%
Movement in the cash surplus
£m
70
60
50
40
30
20
10
0
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
Hampshire Pension Fund
Investment Performance
in 2014/15
The Fund’s investment managers
Global equities
UK equities
Global bonds
UK index linked bonds
Alternative investments
Property
Passive UK/Global equity
Investment Managers 31 March 2015
Asset Allocation by Portfolio 31 March 2015
Total Fund size £5,137m
Market returns in 2014/15
Total investment returns for the Fund
2014/15 Accounts and Fund
Performance
Any questions?
Hampshire Pension Fund
Economic & Market
Outlook
Carolan Dobson
Independent Advisor to
the Hampshire Pension
Fund
Investment Adviser and Trustee Services iAts
Economic and market outlook
October 2015
31
Investment Adviser and Trustee Services iAts
Themes from last year
• Economic paths are diverging across the developed world
• Interest rate policies are becoming different
• Markets have to adjust to the US withdrawal from QE
and a move to normal levels of US interest rates
• Risk is not priced properly
• The Fed believes its role is to establish suitable macro
economic policies and encourage robust financial
institutions, not smooth market performance
• Political uncertainty across Europe, rise of anti-Europe
vote
32
Investment Adviser and Trustee Services iAts
US
• Sou
33
Investment Adviser and Trustee Services iAts
US
34
Investment Adviser and Trustee Services iAts
UK
35
Investment Adviser and Trustee Services iAts
UK
36
Investment Adviser and Trustee Services iAts
Eurozone
• EE
37
Investment Adviser and Trustee Services iAts
Eurozone
38
Investment Adviser and Trustee Services iAts
China
39
Investment Adviser and Trustee Services iAts
China
40
Investment Adviser and Trustee Services iAts
41
Investment Adviser and Trustee Services iAts
US Federal reserve Outlook
42
Investment Adviser and Trustee Services iAts
43
Investment Adviser and Trustee Services iAts
44
Hampshire Pension Fund
Funding Update
Joel Duckham
Aon Hewitt
Hampshire County Council Pension Fund Annual Employers’ Meeting
Actuarial and Funding Update
Joel Duckham FIA
Alison Murray FFA
23 October 2015
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Agenda
 Funding update and outlook for 2016 valuation
 Other issues
– Scheme advisory board
– Abolition of contracting-out
– Cost management process
 Employer considerations
– Grouped funding framework
– Employer policy
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47
Funding update and outlook for 2016 valuation
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Recap on 2013 valuation results
Assets
(£4,340.6M)
4,340.6
Deficit
(£1,087.3M)
Funding Target
(£5,427.9M)
1,998.6
4,327
Actives
956.3
Deferreds
4,661
2,473.0
Pensioners
Whole of Fund funding ratio: 80.0% (Total Assets/Total Liabilities %)
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2013 Valuation – contribution requirements
 Average future service rate:
 Deficit recovery contributions:
 Average Employer rate:
14.1% of pay
7.4% of pay
21.5% of pay
In practice
 Scheduled body group: 13.1% of pay + monetary
amounts
- £59.4M over 2015/16 *
- * + 8.8% increase in April 2016,17,18,and 19. Then
3.9% p.a. increase in April 2020 through April 2035
 Admitted body group: 15.6% of pay + monetary
amounts
- £1.3M 2015/16 *
- * + 20.0% increase in April 2016 and 17. Then
3.9% p.a. increase in April 2018 through April 2035
 Ungrouped employers paying their own rates
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Key assumptions
Discount rate / investment return:
Pension increases :
Pay increases:
Probability of funding success:
5.5% p.a.
2.4% p.a.
3.9% p.a.
71%
Probability of
Funding Success /
Risk
Funding ratio (%)




31 Mar
2013
100%
Date
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Progress since 31 March 2013
100%
Plan
Ongoing Funding Ratio
90%
80%
70%
60%
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30/06/15
31/03/15
31/12/14
30/09/14
30/06/14
31/03/14
31/12/13
30/09/13
30/06/13
31/03/13
50%
Explanation of movement in funding position
100%
90%
3%
80%
-8.0%
1%
77%
80%
1%
70%
60%
50%
Asset
Funding Level Contribution
Financial
Outand
at 31 Mar 2013
Assumptions
Accruals performance
Other
Funding Level
at 30 Jun 2015
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Outlook for contributions
31 March 2013
30 June 2015
Employer future service rate
14.1% of pay
16.8% of pay
Past service surplus (shortfall)
(£1,087.3M)
(£1,547.5M)
-
£15.3M
Additional deficit contributions p.a.
 Employers currently paying c£61M p.a. in deficit contributions
 Approximate update to 30 June 2015 suggests further £15.3M p.a.
required over 22 year deficit recovery period, increasing at 3.6% p.a.
(equivalent to c1.7% pay)
Overall impact 4% - 5% pay
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Market movements since 30 June 2015
Liabilities
Assets
Deficit
7.0
6.0
Billions
5.0
4.0
3.0
2.0
1.0
0.0
Mar 13


Jun 13
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Sep 15
On a “gilts+” basis, funding level fell 4% between 30 June 2015 and 30 Sept
2015
Our funding approach considers outlook for all asset classes in which you
invest, not just gilts
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Recent changes in mortality rates
 2000 to 2011 saw strong reductions in mortality rates (i.e. leading to longer life expectancy)
– Average (population) improvement rate was 2.4% p.a. over the period
 2012 - 2014 improvements in mortality rates were much lower
– Experience was flat in 2012 and 2013 (i.e. mortality rates were broadly unchanged from previous
years)
– 2014 saw stronger improvements but nothing like enough to get back to the previous trend line
 2015 to 31 July - high numbers of deaths compared to previous years, especially in the early months
– Overall mortality rates 2.3% higher compared to same period in 2014
– Partially due to higher than usual number of deaths from flu
Cumulative reported deaths in E&W by week compared
with the average over 2005 to 2014
Cumulative deaths
+30,000
2015
+20,000
+10,000
2005 to
2014
0
-10,000
-20,000
0
Source: CMI Working Paper 83
10
20
30
40
50
Week number
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Outlook for 2016 valuation assumptions
 How should recent experience affect mortality improvements assumption?
 Will increase in mortality rates in 2015 prove to be a blip?
 Is the slowing of improvements in mortality rates since 2011 a sign of a change
in the previous trend?
 Initial view:
– Don’t currently expect to increase allowance for long-term mortality improvements in
2016 valuation
– May be a slight reduction in allowance for improvements in the short-term
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Effect of membership movements
Impact of austerity…
– More early leavers than expected
– Lower pay growth than assumed
– Ageing membership?
Impact of auto enrolment…
– Younger membership?
Take up of the 50:50 Scheme…
– Lower than expected
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Scheme Advisory Board
 Deficit Management Recommendations
-
Standardised basis result
Transparency (past / future)
Minimum employer contributions
Targeting exit position
 KPIs (Benchmarking exercise October 2015)
-
Risk Management
Funding level and contributions
Deficit recovery
Investment returns
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The Fund’s relative position (published basis)
2.0
110%
100%
1.5
90%
£billions
1.0
80%
70%
0.5
60%
0.0
50%
-0.5
40%
30%
-1.0
20%
-1.5
10%
-2.0
0%
Published Surplus/Deficit 2013 - LH Scale
Published Funding Ratio 2013 - RH Scale
Hampshire position 2013
Hampshire position 2013
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The Fund’s relative position (common basis)
2,000
110%
100%
1,500
90%
1,000
80%
70%
£millions
500
60%
0
50%
-500
40%
30%
-1,000
20%
-1,500
10%
-2,000
0%
Surplus 2013 - single basis
Published Surplus
Funding Ratio 2013 - single basis
Hampshire position
Hampshire position
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Wider considerations
 GAD report under Section 13
(2) … employer contributions to be set at an appropriate level to ensure—
(a) the solvency of the pension fund, and
(b) the long-term cost-efficiency of the scheme.
(4) Where an actuarial valuation … has taken place, a person appointed by the
responsible authority is to report on whether the following aims are achieved—
(a) the valuation is in accordance with the scheme regulations;
(b) the valuation has been carried out in a way which is not inconsistent with other
valuations under subsection (3);
(c) the rate of employer contributions is set as specified in subsection (2).
(6) (a) … the report may recommend remedial steps
 Review of Cipfa’s guidance on Funding Strategy Statements (end
2015)
 Cost management process
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Cost management process
Public Service Pensions Act 2013
HMT Directions 2014
LGPS Regulations 2014
HMT Cost Management
Process
SAB Cost Management
Process




Employer cost cap – 14.6%
HMT specified assumptions
No allowance for 50/50 option
Reduced commutation assumption




Total cost cap – 19.5% of pay
1/3rd employee / 2/3rds employer
Allowance for 50/50 option
Unchanged commutation assumption

No action until 2% of pay collar
breached
Consultation with SAB
Default process if no agreement

SAB may recommend changes if cost
is above/below 19.5%
SAB must recommend changes if cost
is 2% of pay above/below 19.5%


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
HMT process takes precedence
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Abolition of contracting-out
 LGPS is “contracted-out” of the second state pension
– Members and employers pay lower National Insurance contributions
– Scheme must provide benefits above a prescribed level
 Single tier state pension from April 2016
 Contracting-out will be abolished
–
–
–
–
Employers will pay higher NICs – 3.4% (c2.3% of pay*)
Members will also pay higher NICs – 1.2% (c0.9% of pay*)
Private sector schemes may amend member benefits/contributions
Public service schemes will not be amended
* Estimate based on sample LGPS fund. Will be highly dependent on employee pay levels
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Questions
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Hampshire Pension Fund
2014/15 Pension
Administration Update
Nick Weaver
Head of Pensions,
Investments and
Borrowing
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5 key issues which need to be
addressed for the LGPS
•
•
•
•
•
Increasing complexity
Relentless reporting
Demands on resources
Maintaining systems & processes
Pressure on employers
Outside our control …
• Increasing complexity
– LGPS addition of CARE
– Tax rules getting even more tricky
– Wider “promises” (and future potential issues)
• Relentless reporting
– Scheme Advisory Board now up and running
– Pension Regulator now (officially) involved
– GAD extra demands, etc. etc.
What Pensions Services need
to do …
• Demands on resources
– Ensure we develop suitably skilled people
– Prioritise the work
– Provide accessible, clear information
• Maintaining systems & processes
– Change of system is good for the future
(but been tougher than you would reasonably think!)
– Processes need constant review
The Pressure on Employers …
• Austerity measures continue
• Pensions are getting more complex
• Less chance to “flex” deadlines
(e.g.2016 Valuation data demands & timetable)
• The basis for us working together is the
“Administration Strategy”
(which has been place for a few years.)
The Administration Strategy …
EOY Returns
• With the CARE changes it has been more important
to get it right …than rush it.
Employers
April
May
June
July
Active membership
201
57
47
37
59%
17%
14%
11%
13,227
5,980
30,955
4,674
24%
11%
56%
9%
342
100%
54,836
100%
• But next year it needs to be on time, for the
2016 Fund Valuation (and shorter ABS deadline)
Retirements (Days)
<-20
-20 to -5
-5 to 0
0 to 5
5 to 10
10 to 20 20 to 40 40 to 60 60 to 90
90 +
197
176
83
50
32
60
37
5
11
12
30%
27%
13%
8%
5%
9%
6%
1%
2%
2%
30%
13%
21%
10%
• Some employers are doing a great job !
• Delays lead to complaints …. and interest payments !
Deferred Beneficiaries (Days)
<-20
-20 to -5
-5 to 0
0 to 5
5 to 10
10 to 20 20 to 40 40 to 60 60 to 90
90 +
70
69
84
101
75
225
289
219
251
1350
3%
3%
3%
4%
3%
8%
11%
8%
9%
49%
15%
8%
11%
67%
• This delay impacts data quality (e.g. FRS17 & Valuation)
• Lose touch with people before we know they left
…… which does not bode well for the future !
• We want to avoid fines … but will need to report this to the
Panel & Board from 1 April
How we support you …
– Employer meetings
(e.g. Employer Focus Group, HAPOG)
– Employer training
(Employer Days for new employers and staff,
workshops on specific topics and End of Year training)
– On-line resources
(Pensions Matters, Employer Guide, website)
For more information …
Please see:
- Website www.hants.gov.uk/pensions
- Pensions Matters
0r contact us on:
- 01962 845588
- pensions@hants.gov.uk
Questions
Hampshire Pension Fund
Employer Considerations
Alison Murray
Aon Hewitt
Employer considerations:
Grouped funding framework
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Grouping mechanism – what we said last year
 303 employers with active members (as at 31 March 2014)
 323 as at 31 March 2015
 Two groups
– Scheduled bodies group
– Admission bodies group
 Long-standing arrangement to
– Smooth contributions
– Share risks
 Evolving to deal with emerging issues
– Differential falls in payroll (LERP)
– Outsourcings (particularly to closed employers)
Source for employer numbers: annual report and accounts
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Progress to date – review of the groups
Scheduled Body Group
£83M
£185M
£231M
£19M
£13M
Admission Body Group
Universities
Councils, Police, Fire &
PO
Universities
£20M
Transferee ABs
£28M
£2M
Colleges
£44M
Schools
Housing
Associations
Community ABs
£59M
Independent
Schools
Resolution bodies
£4,602M
Other
Liabilities as at 31 March 2013
£153M (3% of the Fund)
Liabilities as at 31 March 2013
£5,133M (95% of the Fund)

28 employers whose contributions are assessed individually
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Recap on grouping mechanism

Experience is shared
Whole of fund experience 20102013
£M
Interest on shortfall
-274
Investment profit
268
Pay increase profit
263
-18
Pension increase loss
155
Contributions paid towards the shortfall
Loss from change in financial assumptions -284
48
Profit from change in demographic assumptions
11
Membership movements and other items
Source: 2013 valuation report
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Grouped contributions
 Grouped employers pay “average
future service rate”
 Deficit contributions calculated based
on share of group payroll
 Layered Employer Recovery Plan
– fixes deficit contributions to protect
against falling payroll
Grouping works well where participants are similar
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Initial outcome of review of SBG
 All scheduled bodies admit new members
 Generally publicly funded
 Some difference in profile e.g. schools/academies and colleges less
mature
Do all scheduled employers still “fit”?




Are they classified exclusively as public sector?
Where does their funding come from?
How committed are they to the LGPS?
How financially secure are they?
– Greater focus on employer covenant (SAB, Cipfa guidance on FSS)
Actively considering HE/FE sector’s participation in SBG
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Initial outcome of review of ABG
 Greater variation between employers
– Charities, other not-for-profit, commercial organisations
– Some material difference in profile – e.g. employers not admitting new
members
 Scheduled body funding target not appropriate for those with a guarantor
or who can afford a gilts based exit valuation (if no subsuming body)
 Some employers asking to pay extra contributions
– Individual assessment gives greater control for employers and
permits better targeting of funding position on exit
Actively considering housing associations and education sector
employers’ participation in ABG
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Current funding approach / strategy (in theory)
Strength of funding target
orphan FT
Gilts FT
scheduled body FT
Stronger – less
reliance on
investment returns
Exit
valuations
(orphan
liabilities)
Weaker – more
reliance on
investment returns
Ongoing scheduled body
valuations. Ongoing and exit
valuations for admission
bodies with subsumption
commitment
Ongoing
valuations
(admission
bodies - orphan
liabilities)
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Gap between funding targets is material
Value of liabilities on different funding targets (as at 31 March 2013)
Subsumption
Gilts (exit
basis)
Asset value
5.5%
3.2%
n/a
Employer A (open)
£5.43m
£9.57m
£4.29m
Employer B (closed)
£10.86m
£15.14m
£8.90m
Discount Rate*
* % p.a. as at 31 March 2013
Difference varies according to employer’s membership profile
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Proposal for employers removed from the groups
orphan FT
Gilts FT
intermediate funding target
scheduled body FT
Universities,
Colleges,
Independent
schools
Housing
associations
Any changes to contributions need to be carefully
managed
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Practicalities and next steps
 Removal from group requires notional allocation of assets to employers
– Preferred approach is consistent with accounting and exit valuations
 Best practice indicates transparency and consultation
–
–
–
–
–
Consultation 23 Oct – 20 Nov 2015
Invitation to workshops (Jan 2016) for affected employers
Revised FSS to be considered by the Panel (18 Dec 2015)
Contribution changes will be managed as appropriate
Further communications as part of 2016 valuation exercise
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Questions
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Employer considerations:
Employer policy
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What we promised last year - a road map for employers
 Ensure the grouping mechanism evolves as
required
 Enhanced communication / greater
transparency
– Simple, principles-based admissions policy for
sharing with employers
– Review template admissions agreements
(update for 2014 scheme)
– Simple principles-based exit policy (standalone
or within admissions policy / FSS) for
publication
 Pre-planning for the 2016 valuation
Aim: Clearer, more consistent communication with
employers on actuarial issues
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Employers in the Fund
Employer Type
31 March 2013
31 March 2015
Scheduled
120
164
Resolution
51
58
Admitted
97
101
Total
268
323


Net increase in admitted bodies allows for a number of exits
More admissions in the pipeline
Source: 2013 valuation and 2014/15 Annual report and accounts
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Key elements of employer policy
 Covers admissions and exits
 Framework within which administering authority operates
– principles-based
– linked to funding strategy statement
– ensures consistency
– identifies different types of employer
– focus on managing risk
– helpful for administering authority and employers alike
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Employer Policy
Scheduled Body Group
£83M
£19M
£185M
£231M
£13M
Councils, Police, Fire &
PO
Universities
Why are admission bodies in the
SBG?
 Response to new approaches by
letting authorities
 “Pass through” arrangements
where risk remains with letting
authority
Colleges
£4,602M
Why does this matter?
 Grouping arrangements mean
risks are shared
 Adjustments required where
closed employers join
 Complex and costly unless a
pragmatic approach taken
Schools
Resolution bodies
Other
PO is “protected outsourcings”
Actuarial speak for admission bodies
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Employer policy
 Existing arrangements remain in place
– Power to remove employers from the groups
– Power to adopt a intermediate funding target
– Focus on protecting other employers
 New employers
– Admission bodies and wholly owned companies – stand
alone employers (individual contribution rate)
– Transferor employer’s contributions may be amended
– Town and parish councils – join SBG
– New academies – join SBG
– Bonds / guarantors will be required where appropriate
 Default approach
– Closed admission agreement
– Subsumption commitment from letting authority
– New admission – fully funded
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Employer policy (exits)
 Confirms regulatory position*, i.e. exit valuation
will be carried out when employer
– Ceases to be a Scheme employer
– No longer has any active members
 Little regulatory flexibility
 Funding Strategy Statement sets out how
liabilities on exit are calculated
* See Regulation 64 of the LGPS Regulations 2013
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Next steps
 Draft Policy will be circulated for consultation
 Consultation ends 20 November 2015
 Policy will be considered by the Panel on 18 December
 Final policy will be published on Fund website
 Subject to regular reviews (at least triennially)
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Questions
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