Leicestershire Pension Fund Annual General Meeting

LGPS up-date John Wright Barry McKay 15 January 2013 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

Some topical issues

2013 Valuation Pensions Reform: LGPS 2014, Governance, Cost Control Auto-enrolment New flat-rate state pension Other issues: Infrastructure and local investment 2

2013 Valuation

Investment performance since 2010 valuation Sterling total returns of major asset classes (rebased to 100 at 31 Mar 2010)

150 140 130 120 110 100 90 80 31 Mar 2010 31 Mar 2011 UK equities (FTSE All Share) 31 Mar 2012 Index-linked gilts (FTSE over 15 years)

Bonds Shares

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But interest rates have fallen

Government bond yields and inflation 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% FTSE UK Gilts Annual Yield Series (over 15 years) March 2010 Inflation 5

Deficits have increased

95% 85% 75% 65% 55% 45% Funding Level Assets Liabilities Lower funding levels, higher contributions Source: Sample LGPS Fund, 30 September 2012 Navigator Report 4500 4000 3500 3000 2500 2000 6

Summary

Investment returns in line with long term assumption But interest rates down and liability values up Deficits have grown Savings from new scheme modest – increase in contributions at 2013 less than would otherwise have been the case Continuing upwards pressure on contributions Contributions likely to stay at current levels or above for longer 7

Changing LGPS scheme membership 2007 2010 2013 51% 38% 42% 46% 36% 11% 12% 16%

Active Deferred Pensioner Active liability: 51% in 2007 to 42% in 2010 to 36%? in 2013

48%

Employee membership falling, more pensioners Source: Hymans Robertson, based on a sample County Council pension fund – not Leicestershire.

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Why is LGPS scheme membership changing?

Redundancies Early retirements Fewer new recruits More outsourcing Council payroll shrinking e.g. transfers of staff to academies Admission agreements often closed to new recruits 50/50 option in LGPS 2014 What impact will auto-enrolment have?

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Cashflow worsening?

Cashflow OK now ...

Projected net cash flow position

40 20 0 -20 -40 -60 -80 2012 2014 2016 2018 2020 2022 2024

Cash in financial year

2026 2028 2030 ... small reductions in members changes picture

Projected net cash flow position

40 20 0 -20 -40 -60 -80 -100 -120 -140 -160 2012 2014 2016 2018 2020 2022 2024

Cash in financial year

2026 2028 2030 But most Funds have enough investment income

Projected net cash flow position

140 120 100 80 60 40 20 0 2012 2014 2016 2018 2020 2022 2024

Cash in financial year

2026 2028 2030 Source: Hymans Robertson, based on a large LGPS fund.

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Reform: LGPS 2014

New LGPS from 2014

Benefit Type Accrual Rate Retirement Age Member Contribution Rate

Existing Scheme

Final Salary 1/60 th 65 Average 6.5% Full-time equiv. pay

Proposed New Scheme

CARE with CPI revaluation 1/49 th State Pension Age 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 12

How much pension is enough?

140% 120% 100% 80% 60% REFERENCE SCHEME Earnings growth in line with increases in average earnings Turner recommendations 40% $10 000 $20 000 $30 000 $40 000 $50 000

Earnings at Retirement

$60 000 $70 000 Good design?

Chart based on CARE scheme with 1/60 th accrual and allows for Basic State Pension of £140 per week. Assumes the member has a full public service career (45 years in this example) and remains in the scheme throughout. Sources: Hymans Robertson (2011) and Turner (2004) 13

Public Sector Pensions Bill

Covers LGPS & unfunded (all parts of the UK) Design changes common to all schemes CARE (no future Final Salary DB), SPA link “Cost control” measures Cap and collar on employer contributions Stronger governance and arms’ length oversight: High regulatory hurdle to prevent further reform within 25 yrs Implement by 2015 (2014 for LGPS in E&W) Scheme specific details in secondary legislation 14

LGPS cost control

Life expectancy increasing faster than SPA Life expectancy and State Pension Age

100 95 90 85 80 75 70 65 60 55 50 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Men: Life expectancy from birth Men: Projection of life expectancy Men: SPA Women: Life expectancy from birth Women: Projection of life expectancy Women: SPA LGPS costs could continue to increase Population life expectancy vs State Pension Age 16

“Cap and collar” cost control

6.5% Employee contributions 6.5% Employee contributions 13% Employer cost 16% Employer cost “Cap” “Ceiling” 19.5% total 22.5% total 6.5% Employee contributions 13% Employer cost Trigger breached, reduce benefits and cost 19.5% total 17

Threats to sustainability

Benefits still generous and savings modest?

Will SPA keep up with life expectancy?

Cost management (caps/collars etc) effective?

Envy (continuing decline in private sector pensions) Economy underperforming over long term Politics (either lack of will or too much interference) 18

Auto-enrolment

Workers confused?

“Thousands baffled over compulsory pensions”

Express, 10 December 2012 Need for good communication 20

Auto-enrolment and LGPS employers

Many have staging dates in first half of 2013 Many employers will defer until 2018?

To save money?

To avoid implementation cost and effort?

Still need to comply for new joiners, birthdays, pay changes 21

Other topical issues

Other topical issues

Local investment & infrastructure but ...

Responsibilities of pensions committee Sufficient diversification?

Best available investment of its type?

Availability of suitable investments?

Riskiness of currently available investment opportunities? Excessive fees?

Consultation on investment regulations (LLPs) Fund mergers and shared services 23

Thank you

Any questions?