1. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 Suffolk Pension Fund 2016 valuation – update for AGM Peter Summers Craig Alexander 7 October 2016 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

2. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 2 What are we going to cover? Actuarial valuation basics 2016 valuation update Next steps Setting contributions CONTRIBUTION STRATEGY LONG TERM LIKELIHOOD OF SUCCESS AVERAGE OF THE WORST 5% OF FUNDING LEVELS IN 2035 Strategy 1 58%39% Strategy 2 77%55% Strategy 3 67%45%

3. 3 Valuation basics

4. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 4 Why do we do the valuation? Compliance with legislation Set employer contribution rates Calculate solvency (“funding level”) Monitor experience vs. assumptions Manage risks to Fund and employers Ultimate objective is to hold sufficient assets to pay members’ benefits

5. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 5 Valuing a single member Lump Sum Dependant’s Pension Member’s Pension 4065 85 Recruitment Expenditure Income Retirement Death Contributions

6. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 6 Add all members (past & present) per employer Pension Amounts (£) Millions

7. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 7 Overview of the valuation Actual cost of a Scheme will depend on the pensions actually paid The valuation is an estimate of how much money will be needed to pay the pensions Estimate is based on assumptions about –amounts of benefit payments –probability of benefits being paid

8. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 8 Liability valuation – “deterministic” assumptions Amounts paid and probability of payment Financial assumptions: Investment return Inflation Pay increases Pension increases Consider: Economic outlook Actual scheme assets Historical pay growth Demographic assumptions: Life expectancy Retirement age/cause Withdrawals Marriage statistics Consider: Population trends Members’ social status Past scheme experience

9. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 9 Discount rate RPI - market’s view of the difference in yields on long- dated government fixed interest and index-linked bonds. CPI pension increases Salary increases Financial assumptions Investment Contributions RPI CPI “one per cent per year for the next four years”

10. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 10 Demographic assumptions Evidence based Analyse past experience number of pensions ceasing pension commutation to lump sum marriage statistics etc Using the largest pool of LGPS data

11. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 11 One big pot of assets Actuary calculates how much is notionally allocated to each every three years Council Academy Contractor Charity Ring-fenced employer assets and liabilities

12. 12 2016 valuation inputs

13. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 13 Membership data

14. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 14 Employer data Membership data Accounting data Employer database Employer questionnaire responses?

15. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 15 Key assumptions for funding target 2013 valuation2016 valuationDerivation of assumption Discount rate (assumed future investment return) 4.6%4.0%Change in approach: Gilts plus prudent asset out- performance assumption (AOA) At 2013: AOA = 1.6% p.a. At 2016: AOA = 1.8% p.a. Pay growth4.3%2.4%Change in approach: At 2013: RPI + 1.0% At 2016: RPI – 0.7% Pension increases (CPI)2.5%2.1%Change in approach: At 2013: CPI = RPI - 0.8% At 2016: CPI = RPI - 1.0% 50:50 take up10%5%Lower than anticipated take up LongevityClubVITA with CMI 2010 model for future improvements ClubVITA with CMI 2013 model for future improvements 2013 not 2015 in order to remove volatility experienced in last two years

16. 16 Whole fund results

17. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 17 Where were we in 2013? 31 March 2013 Active889m Deferred364m Pensioner982m Total liabilities2,235m Assets1,767m Deficit(468m) Funding level79%

18. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 18 Experience since 2013 (yields) Falling yields have increased liabilities and accrual cost…

19. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 19 Experience since 2013 (assets) …but asset returns have been stronger than expected

20. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 20 Key assumptions for funding target 2013 valuation2016 valuationDerivation of assumption Discount rate (assumed future investment return) 4.6%4.0%Change in approach: Gilts plus prudent asset out- performance assumption (AOA) At 2013: AOA = 1.6% p.a. At 2016: AOA = 1.8% p.a. Pay growth4.3%2.4%Change in approach: At 2013: RPI + 1.0% At 2016: RPI – 0.7% Pension increases (CPI)2.5%2.1%Change in approach: At 2013: CPI = RPI - 0.8% At 2016: CPI = RPI - 1.0% 50:50 take up10%5%Lower than anticipated take up LongevityClubVITA with CMI 2010 model for future improvements ClubVITA with CMI 2013 model for future improvements 2013 not 2015 in order to remove volatility experienced in last two years

21. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 21 2016 salary growth assumption

22. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 22 Whole fund valuation results 31 March 201331 March 2016 Active889m818m Deferred364m478m Pensioner982m1,134m Total liabilities2,235m2,429m Assets1,767m2,213m Deficit(468m)(216m) Funding level79%91% But…employers differ...& what about contributions?

23. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 23 Why has the funding position changed?

24. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 24 Financial experience Broad impact on balance sheet at 31 March 2016 Increase in AOA70m Increase in RPI-CPI gap70m Lower long term salary growth160m Change in underlying market conditions(315m) Total gain (loss) from financial experience(15m)

25. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 25 Membership experience since 2013 Pay growth –Lower than expected (2.2% p.a. vs 4.9% p.a.) –Does vary across employers Pension increases –Actual 2.7%, 1.2%, 0.0% (3.9%) –Expected 2.5% p.a. (7.7%) Movements –Fewer ill health retirements than expected –Fewer early leavers than expected –Fewer pensioner deaths than expected 50:50 take-up –Lower than expected

26. 26 Setting contributions

27. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 27 Context – a new risk based approach The future is uncertain A single set of assumptions is ineffective Important to understand level of risk Increased number and diversity of employers so…. ….one size fits all strategy may not be appropriate Tailored strategies can reduce risk and achieves better outcomes Increased scrutiny Bespoke employer funding strategies

28. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 28 Employers – new approach Manage employer risks Admin Authority must ultimately protect the Fund

29. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 29 Setting employer contribution rates Understand employersWhat is their funding target? How long do we want to give each employer to get to the target? How much risk can each employer take to hit the target?

30. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 30 Employers are different Term Maturity Security Guarantor Planning to exit Closed to new entrants Funding level Set a funding strategy which recognises this diversity to achieve better funding outcomes Size No actives

31. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 31 Setting contribution rates – secure employers – stabilisation recap Source: a picture to illustrate principle

32. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 32 Setting contribution rates - secure employers Years from valuation date 0% 25% 50% 75% 100% 125% 150% 175% 200% 0369121518 Funding Level (%) Median 1 in 6 chance Need a good chance of meeting funding objective to be prudent Source: Hymans Robertson LLP, comPASS, sample output

33. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 33 Setting contribution rates: other employers CONTRIBUTION STRATEGY LONG TERM LIKELIHOOD OF SUCCESS AVERAGE OF THE WORST 5% OF FUNDING LEVELS IN 2035 Strategy 1 58%39% Strategy 2 77%55% Strategy 3 67%45% The ‘new’ world The ‘old’ world Risk based contribution rate strategies set for all

34. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 34 Other employers - risk based contribution rates Help all parties understand approach to setting contribution rates (including SAB and DCLG) Transparent approach to funding plans

35. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 35 “Lower for longer” – if I’ve heard it once, I’ve heard it…… Many concerns pre-date the Brexit result  OBR growth forecasts cut in Spring budget 2016  investment managers falling over themselves to be gloomy And then Brexit - ? Outlook for financial markets

36. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 36 Employer results – direction of travel Whole fund story is “balance sheet better, but cost of benefits much higher” …..but all employers characteristics, 2013 position, experience, concerns and futures will differ Early general indications - despite reductions in deficit, contribution pressure remains

37. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 37 Funding Strategy Statement (FSS)

38. 38 Next steps

39. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 39 Setting contributions Firm up on employer balance sheet results Determine risk based approach and contributions Consult on the results and FSS Determine how cash to be paid will actually be expressed (% of pay or £ or mix)

40. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 40 Engage with fund  respond to questionnaire so fund “understands” you  respond to FSS consultation Consider your obligations beyond next 3 years Manage your risks  consider ill health risks and insurance  consider extra security to help fund give greater funding flexibility  ensure bonds are up to date Do admin promptly  Alert fund of membership changes (leavers and new joiners)  Provide accounting information promptly Actions for employers

41. 41 Thank you

42. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 42 Lower for longer – cost of scheme? ChangeChange in cost Employer cost of 2014 scheme (best estimate) Original cost envelope-13.0% of pay Revaluation/transfers1.3%14.3% of pay Minimal take-up of 50:50 option1.0%15.3% of pay Change in GAD net discount rate due to lower GDP estimate 1.1%16.4% of pay Lower for longer change in net discount rate? 1.8%18.2% of pay Is the original cost envelope still appropriate?

43. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 43 Public Service Pensions (Record Keeping) Regulations Governance and administration of public service pension schemes Local Pension Board Scheme Advisory Board The Scrutineers

44. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 44 The two “regulators” RegulatorSABDCLG (GAD) Powers?InfluenceStatutory Request valuation info by30 Sep 2016 (ish)Q2 2017 What requested?Basket of Key Performance Indicators Different Key Performance Indicators Actuarial basisHMTDifferent Publish results?Possibly, in Q4 2016 Probably, in mid- 2018

45. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 45 Pooling Savings from reduced investment costs Investment manager decisions made by pools Still a work-in-progress

46. 63 166 204 108 188 216 155 210 229 210 234 242 253 200 47 254 223 134 253 211 93 254 235 180 110 192 64 151 210 118 183 224 160 218 239 207 242 1 108 247 61 150 249 127 185 251 191 220 75 100 125 53 67 77 46 Reliances and Limitations This presentation is addressed to the Suffolk Pension Fund for its sole use and not for the purposes of advice to any other party; Hymans Robertson LLP makes no representation or warranties to any third party as to the accuracy or completeness. This presentation discusses the current issues in the LGPS and was prepared for presentation to employers. Hymans Robertson LLP accepts no liability from anyone who uses it for any other purpose. The following Technical Actuarial Standards* are applicable in relation to this presentation and have been complied with where material: –TAS R – Reporting; –TAS D – Data; –TAS M – Modelling; and –Pensions TAS. * Technical Actuarial Standards (TASs) are issued by the Financial Reporting Council and set standards for certain items of actuarial work, including the information and advice contained here.