Staffordshire Pension Fund Results of 2010 valuation and Funding Strategy consultation John Wright November 2010

Agenda 2010 valuation results Major risks and uncertainties Consultation on Funding Strategy Next steps

2010 VALUATION RESULTS

Assets stumbled, liabilities grew Source: Hymans Robertson, Navigator, 2007 valuation assumptions, RPI not CPI

Funding level (solvency) fell Source: Hymans Robertson, Navigator, 2007 valuation assumptions, RPI not CPI

Outlook for contributions Results differ for individual employers Source: Hymans Robertson, Navigator, Staffordshire Pension Fund, 2007 valuation assumptions, RPI not CPI

Falling yields on inflation proof bonds Lower interest rates => increase value placed on liabilities

Better news this year .. Investment markets – strong year to 31 March 2010 Emergency budget on 22 June 2010 Lower pension increases (CPI, not RPI) Lower revaluation for deferreds Pay restraint Hutton review of public service pensions Comprehensive Spending Review on 20 October

Whole fund results: balance sheet Deficit has grown

Net effect? Bigger deficit, higher contributions Why has deficit grown? Upwards pressure on contributions Investment market underperformance Low interest rates on inflation proof bonds People living longer Factors that helped contain contributions CPI (in payment and deferment) Pay restraint Later retirement Base mortality Net effect? Bigger deficit, higher contributions

Main changes to assumptions since 2007 Details Effect Pension increases CPI, not RPI Revaluation of deferreds Pay freeze 1% for two years Longevity improvements Bigger allowance Retirement pattern Retiring later Long term CPI/RPI Higher

Experience since 2007 valuation Investment returns Salary experience Actual higher than might have expected due to job re-evaluation? Investment market underperformance increased deficits

Analysis of increase in deficit Negatives Positives

Impact on theoretical contribution rates Results before applying stabilisation policy Individual employer results will vary

Some example results Results for individual employers will vary County Council* District* Housing Association FE college* Contractor Deficit repayment 20 years 15 years Remaining contract term Future service rate 16.3% 15.2% 17.0% 15.8% 21.2% 8.5% 14.9% 9.8% 5.0% £74k pa Total 24.8% 30.1% 26.8% 20.8% 21.2% + £74k pa Results for individual employers will vary *Before stabilisation overlay

RISKS AND OTHER UNCERTAINTIES

Risks and other uncertainties Long term pension fund risks Inflation, life expectancy, investments, maturity Spending cuts / reduction in workforce Accelerates maturity, reduced contributions, early retirements Government policy in public service delivery? E.g. More outsourcing? Hutton review of public sector pension schemes Nature of changes and timescale uncertain Spending review: increase in employee contributions in short term

Impact of reduction in workforce Early retirements – additional pension costs More deferred members Amount of contributions falls Payroll Contributions Cash (% pay) £100 20% pay £20 £80 £16 15% pay + £5pa £15 + £5 = £20 (20%) £12 + £5 = £17 (21%) £50 £7.50 + £5 = £12.50 (25%) Better to express deficit repayments as cash amounts

Whole Fund Contributions covers expenditure until 2025 Crossover 15 years Contributions covers expenditure until 2025

Whole Fund: 20% reduction in workforce Crossover Contributions cover expenditure only until 2015

Mature employer: “cashflow negative” Contributions not enough to cover benefit payments: need to cash in investments to pay benefits

Mature employers: fewer contributors Less mature employer 50% contributing 50% non-contributing £100 Payroll £20 Liabilities = 5 x payroll More mature employer 40% contributing 60% non-contributing £100 Payroll £12.50 Liabilities = 8 x payroll Similar deficit, smaller payroll, bigger % of pay contributions needed

FUNDING STRATEGY

Funding strategy: issues to consider Can we continue existing stabilisation policy? What modifications might be appropriate? Who qualifies? Impact of reduction in workforce? Different approach for mature employers? Approach for short term employers like contractors?

Stabilisation for long term secure employers 30 20 Contributions % pay Theoretical contributions 10 Actual contributions paid 2007 2010 2013 2016 2019 Underpay in bad times, overpay in better times

Test range of potential long term outcomes 200% 1 in 6 chance 175% 150% Funding Level (%) 125% Median 100% 1 in 6 chance 75% 50% 25% 0% 3 6 9 12 15 18 Years from valuation date Check long term objective (full solvency) can be achieved Source: Hymans Robertson LLP, sample fund, based on conditions at 31 October 2008

Stabilisation policy Current policy Why review? Increases limited to 0.5% of pay per year Reductions limited to 2.0% of pay per year 6 years from March 2008 (following 2007 valuation) 3 years’ warning of change (sooner if major change in an employer’s membership) Long-term, secure employers qualify (including precepting) Why review? Chances of achieving full solvency in long term is lower Worries over security Expected reduction in workforce - reduction in contribution income Increasing maturity is an issue - some cashflow negative employers

Funding Strategy consultation Stabilisation for long term, secure Future uncertainties, no guarantee for 2014 onwards Possible changes from 2014: Change limits on contribution increase/reduction One size fits all unlikely to continue Different tiers, e.g. more mature, cashflow negative, etc Continue to reserve right to review eligibility in event of significant changes in membership (as per current FSS)

Funding Strategy consultation (contd) To cope with reductions in workforce (redundancy, out-sourcing): Consider expressing deficit repayments as £ cash Reserve right to increase % pay contributions if significant reduction in workforce before 2014 For employers outside stabilisation programme: additional security for Fund or a guarantor will help For new contractors in future, alternative options: including “pass-through”, etc

Contractors – in future Risk resides with authority awarding the contract The awarding authority may choose preferred approach Option 1: Current approach transfer past service fully funded at commencement contractor responsible for all liabilities incl pre-contract service variable contributions during contract term possible deficit payment at end outcome random depending on market conditions at start and end Uncertainty of contributions and shortfall at end

Contractors – in future Option 2: Pass-through / risk-sharing Version A: fixed contribution rate (eg 20%) no cessation payment Version B: awarding authority retains responsibility for pre-contract service liable for any shortfall on contract service liabilities In all versions, contractor responsible for own actions, e.g. excessive pay awards, early retirements, ill-health decisions Awarding authority retains some risk good practice to quantify potential subsidy More certainty for contractor, cleaner contract price?

Contractors – in future Option 3: Pooling with awarding authority Pay same (stabilised) rate as awarding authority No cessation payment Pay for own actions excessive pay awards, early retirements, etc May pool ill-health Awarding authority pool retains some risk May be more suitable for outsourcing involving small numbers Less risky for contractor, simple, level playing field for outsourcing vs in-house

NEXT STEPS

Next steps Consultation on Funding Strategy Statement Individual employer results Final valuation report (March 2011) New rates for 3 years take effect 1 April 2011

Thank you

Reliances and limitations This document is provided to our client, Staffordshire County Council, in its capacity as Administering Authority to the Staffordshire Pension Fund (the “Fund”). It has been prepared by Hymans Robertson LLP to brief employers on the valuation result and potential options for changes to Funding Strategy Statement (FSS). The methodologies and assumptions are documented separately. Individual employer results will differ from whole Fund results. This document should not be released or otherwise disclosed to any other party without our prior consent, in which case it should be released in its entirety. Hymans Robertson LLP accepts no liability to any party unless we have expressly accepted such liability in writing. Whilst the results are based on Fund specific information as provided by the Administering Authority and based on the 2010 valuation data, there may be some elements of the analysis which are based on a sample fund (which are highlighted as such). 36 36 36