Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Conduct Authority Leicestershire County Council Pension Fund Valuation Results Employer Forum John Wright, Fund Actuary Barry McKay, Actuary 27 November 2013

Agenda Why do we do a valuation? Valuing the Fund Where we were and where we are now Employer results

Summary Funding level has reduced; so Deficit has increased; so Contribution rates increasing; but Can be managed as outlined

Why do we do a valuation?

Why do we do a valuation? We have to! Assess how well pension promises are covered Monitor experience vs. assumptions Set credible funding plan Recommend employer contribution rates for next 3 years Consider potential risks to the Fund & employers Central part of risk management of the Fund

Who does what? Funding Strategy Statement Administering Authority Actuary Employers Provide advice & formal report Regular communication Rates & Adjustment Certificate ( ) Statutory requirement every 3 years

How the Fund works a) Investment returns b) Member contributions c) Employer contributions Leicestershire County Council Pension Fund Benefits to members and dependants (as per LGPS Regulations) (Benefits to local economy too) a)Determined by investment strategy and manager performance b)Determined by LGPS Regulations c)Must meet balance of cost over longer term: valuation calculation

The ultimate objective How much money does the Fund need, and how should it be invested, in order to be able to meet the promised benefits? Assets Which ones? How is it done efficiently? ? What are the liabilities?

Achieving the objective Assets Future outperformance Future contributions Assets Liabilities St ructur e Managers

Valuing the Fund

Valuing a single member

Valuing the whole fund and paying the pensions

Anticipating investment returns 4.8% p.a.

Long term assumptions Financial Salary increases Pension increases Discount rate Demographic Longevity Early leavers Retirement age Dependants

Financial assumptions (All rates p.a.) Discount Rate6.3%4.8% Inflation (CPI)3.3%2.5% Salary Increases5.3%4.3% Net pre-retirement discount rate 6.3% - 5.3% = 1.0% 4.8% - 4.3% = 0.5% Net post-retirement discount rate 6.3% - 3.3% = 3.0% 4.8% - 2.5% = 2.3%

Vita’s lifestyle effect (postcode based) High life expectancy Mid life expectancy Low life expectancy Source: Club Vita research based on VitaBank as at January 2012

New LGPS from 2014 Existing SchemeProposed New Scheme Benefit TypeFinal SalaryCARE with CPI revaluation Accrual Rate1/60 th 1/49 th Retirement Age65State Pension Age Member Contribution Rate Average 6.5% Full-time equiv. pay Average 6.5% Actual pay Vesting Period3 months2 years Accrued rights protected (incl. retirement age, R85, final salary link) Existing scheme underpin for members within 10 years of NPA (age 65) at 1 April 2012 Introduction of a “50/50” option to bolster LGPS participation Cap and Collar?

Where we were and where we are now

Discount rate sets the Target Assets Investment returns Interest rates Contributions

Then and now – balance sheet £529m £1,024m Funding level of 80% Funding level of 72%

What has happened since 2010? Key driverEffect on Surplus/Deficit (£m) Deficit at 31 March 2010(529) Market conditions (net discount rate) (410) Investment returns29 Life expectancy(50) Member experience50 Other (interest, demographics etc) (114) Deficit at 31 March 2013(1,024)

Then and now - contributions New scheme saves 2% but is no silver bullet Future service cost Deficit contributions 14.3% 5.7% 10.2% 18.2%

Employer results

Funding levels and deficits vary Every employer is different Funding levels across 4 employers Employer 1 Employer 2Employer 3Employer Funding level 78%86%96%107% 2013 Funding level 69%75%83%86% Increase in deficit £6.9m£1.9m£0.4m£21k

Early results – 2014 scheme impact Source: Hymans Robertson – Typical County Council Fund Increased cost Reduced cost Expected saving?

Why are there differences? Balance sheet positon How much you have paid in over the years Membership and changes (profile, ages, M/F, etc) Falling payrolls High or low pay awards Retirements, IH retirements and deaths Strength of covenant Deficit repayment periods Stabilisation used if long term, secure employers

Managing contributions Modelling using 5000 economic scenarios Allows for best estimate asset returns Allows for gilt yields rising Sets contributions with a 2/3rds chance of being fully funded over long term Similar model can be used for shorter term employers

Summary and conclusions

Take home messages Funding levels will fall for most employers; Contribution rates will increase for most employers; Large variability between employers; Increases can be managed in most cases