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

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

3. 2010 VALUATION RESULTS

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

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

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

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

8. 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

9. Whole fund results: balance sheet
Deficit has grown

10. 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

11. 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

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

13. Analysis of increase in deficit
Negatives
Positives

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

15. 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

16. RISKS AND OTHER UNCERTAINTIES

17. 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

18. 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
£ £5 = £12.50 (25%)
Better to express deficit repayments as cash amounts

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

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

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

22. 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

23. FUNDING STRATEGY

24. 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?

25. Stabilisation for long term secure employers30 20
Contributions % pay
Theoretical contributions 10
Actual contributions paid
2007
2010
2013
2016
2019
Underpay in bad times, overpay in better times

26. 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

27. 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

28. 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)

29. 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

30. 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

31. 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?

32. 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

33. NEXT STEPS

34. 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

35. Thank you

36. 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