Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority Hertfordshire County Council Pension Fund The search for stable contributions Bryan Chalmers, FFA Barry McKay, FFA 23 March 2010

2 What we’ll cover today Basics 2. Funding update 3. Stability 4. Individual employers

3 What is the plan for the 2010 Valuation? There is a lot of work for the administration team 1. Basics 2. Funding update 3. Stability 4. Individual employers

4 Data submission for 2010 Rely on accuracy of membership data Administering Authority require information from employers Changes in membership Correct salaries/contributions paid Missing/incorrect data could result in: A higher value being placed on liabilities A higher contribution rate 1. Basics 2. Funding update 3. Stability 4. Individual employers

5 Promise now, pay later Lump Sum Dependant’s Pension Member’s Pension Recruitment Contributions Expenditure Income Retirement Death 1. Basics 2. Funding update 3. Stability 4. Individual employers

6 Future cashflows 1. Basics 2. Funding update 3. Stability 4. Individual employers

7 Why do we do a valuation? We have to Recommend employer contribution rates Assess how well pension promises are covered? Monitor experience vs. assumptions 1. Basics 2. Funding update 3. Stability 4. Individual employers

8 Assumptions Financial Assumptions Investment return/ Discount rate Inflation Pay increases Pension increases Consider: Economic outlook Actual Scheme assets Historical real pay growth Demographic Assumptions Life expectancy Member Options Withdrawals Marriage statistics Consider: Population trends Members’ social status Past Scheme experience Amounts paid:Probability of payment : 1. Basics 2. Funding update 3. Stability 4. Individual employers

9 We are living longer – but local variation High life expectancy Mid life expectancy Low life expectancy 1. Basics 2. Funding update 3. Stability 4. Individual employers

10 Current funding level 1. Basics 2. Funding update 3. Stability 4. Individual employers

11 Funding plan at 31 March 2007 “ £3.6bn £4.8bn Self- sufficient £3,212m Assets £ 2,152m Future excess returns £ 672m (1)i.e. returns in excess of return on gilts (1) Deficit conts £ 388m (2) (2)Present value of deficit recovery payments over 20 years 1. Basics 2. Funding update 3. Stability 4. Individual employers

12 Since the valuation Self- sufficient £ 4,116m Assets £ 2,226m Future excess returns Deficit conts £388m 11 March 2010 Future excess returns £830m How can we fill this gap? 1. Basics 2. Funding update 3. Stability 4. Individual employers

13 How do we cope? - traditional valuation approach Funding Level 100% Year 1. Basics 2. Funding update 3. Stability 4. Individual employers

14 Allowing for future returns 1. Basics 2. Funding update 3. Stability 4. Individual employers

Projected Funding Level Time median Worst outcomes Best outcomes 1% 95% 84% 16% 5% 99% A range of potential long term outcomes 5,000 simulations of the future Rank from worst to best outcome to give distribution of possible outcomes 1. Basics 2. Funding update 3. Stability 4. Individual employers

16 Can we rely on investment returns if we have long term secure covenant? Median... but must understand the risks Source: Hymans Robertson, comPASS, Hertfordshire County Council Pension Fund 16% 5% 1% 1. Basics 2. Funding update 3. Stability 4. Individual employers

17 For long term secure employers only... Limit increases and future decreases (+1 and -1% p.a.) without harming expected long term funding level Underpay in bad times, overpay in more favourable conditions More affordable contributions, greater budgeting certainty 1. Basics 2. Funding update 3. Stability 4. Individual employers

18 Benefits of risk based valuation Understand Fund dynamic Early warning system Better Governance/More Transparency Employer specific analysis Support for change 1. Basics 2. Funding update 3. Stability 4. Individual employers

19 Less secure & shorter-term employers Challenge: protect the fund avoid pushing employers into insolvency Reconsider deficit recovery Seek additional security Understand the risks Assess the likelihood of meeting target funding 1. Basics 2. Funding update 3. Stability 4. Individual employers

20 What is target funding level by next valuation? What is probability will be on track in 3 years? X End of contract term Funding Level 100% 80% 65% X 1. Basics 2. Funding update 3. Stability 4. Individual employers

21 Well-funded stable employer 1. Basics 2. Funding update 3. Stability 4. Individual employers Funding level = 88% Current rate = 16% Theoretical rate = 22% Restricted rate = 19%

22 Poorly funded employer 1. Basics 2. Funding update 3. Stability 4. Individual employers Funding level = 60% Current rate = 20% Theoretical rate = 30% Restricted rate = 24%

23 Conclusions and next steps For long term secure employers Increases in contributions required But can stabilise increases Without any long term damage to the Fund Underpay in bad times, overpay in more favourable conditions For other employers Increases in contributions inevitable Dialogue with AA is essential Risk assessment to test likelihood of meeting target funding Based on evidence of security 1. Basics 2. Funding update 3. Stability 4. Individual employers

Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority Thank You Any questions?