1. UK Actuarial Advisory Firm of the Year Kent County Council Pension Fund 2013 Actuarial Valuation graeme.muir@bwllp.co.uk roisin.mcgee@bwllp.co.uk

2. Agenda What is an actuary? Why do we need one? Role of actuary in the LGPS How do we do valuations? 2013 Valuation Results 2

3. What is an Actuary? Crystal ball gazer? 3

4. What is an Actuary? Thinking mans bookmaker? 4

5. What is an Actuary? Mathematical wizard? 5

6. What is an Actuary? Accountant with a personality? 6

7. What is an Actuary? Assessors/quantifiers of long term financial risks and uncertainties We “value” future uncertain cashflows Life Insurance Investment Pension Funds General Insurance Healthcare Capital Projects 7

8. UK Actuarial Advisory Firm of the Year Why do we need an actuary ?

9. Costing the pension promise Employer makes benefit promise when employment commences Cost of benefit promise not known in advanceNeed to assess the cost of the promise madeTwo stage process Estimate the future pension liabilities Place a value of them More than one valuation possible! 9

10. UK Actuarial Advisory Firm of the Year How do we do valuations?

11. Purpose of valuations Many questions! Approach depends on question being asked How much do employers need to pay in future to have enough assets to pay benefits? Ongoing triennial funding valuation Help accountants compare If we were a plc how much would we need to borrow to finance liabilities? Annual accounting valuations (IAS19/FRS17) 11 Accounting deficit usually bigger than funding deficit

12. Triennial Funding Valuation to certify levels of employer contributions to secure the solvency of the Fund Set out in LGPS Regulations As determined by administering authority With some actuarial help! Also have to look at Funding Strategy Statement Function of Funding Model / investment strategy Spreading and stepping Actuary to “have regard to desirability of maintaining as stable a contribution rate as possible” Statutory/non statutory bodies Open or closed admission agreements Different approaches possible for different employer types 12

13. Annual Accounting Valuations Essentially the same FRS17 or IAS19 Help accountants compare Key objective is consistency of measurement Discount rate Some hard coding of assumptions Lots of volatility Some counter intuitive results sometimes Inconsistent asset and liability valuations 13

14. How do we do it? Step 1 Projection of all possible benefit payments for each member Step 2 Attach probabilities to each possible payment to get “expected” payments Step 3 Discount “expected” payments to obtain “value” 14 Total cashflows – around £17bn

15. How do we do it? Look at accrued benefits and future benefits separatelyPast Service Compare assets with value of accrued benefits Future Service Determine contribution required to meet value of annual accrual of benefits Calculations completed at Whole fund level At individual employer level to identify any outliers and for accountants! But maybe pool similar employers to help with stability Price of stability is some cross subsidy 15

16. Assumptions Price Inflation (RPI) Bank of England Inflation Curve CPI adjustment required – 0.8% Salary Increases Long term – a bit more than inflation Short term - inflation Discount rates Depends on purpose of the valuation Statistical assumptions Investigate past experience Use national data Adjust for actual experience 16

17. Discount Rates Choice of discount rate depends on the question being asked Funding valuation What contributions are required to build up a fund of assets to meet pension liabilities for a given investment strategy? Accounting valuation How much would a corporate body need to borrow to finance their pension liabilities? 17

18. Discount Rates Accounting valuation Corporate bond yields / cost of borrowing Ongoing funding valuation Expected future investment returns from actual investment strategy Gilts and bonds – easy…. Redemption yields Equities – less easy…. Fixed risk premium over gilts (Gilt + model) Economic model (BW model) Property/alternatives – keep it simple Somewhere between equities and gilts 18

19. Financial Assumptions - Summary 19 Property returns 75% of equity return and 25% of gilt return

20. Statistical Assumptions 20 Pre retirement Based on LGPS experience Post Retirement mortality SAPS 1 Tables Fund specific rating 100% 1.5% pa improvement factor

21. UK Actuarial Advisory Firm of the Year Valuation Results

22. Assets and Fund Accounts 22

23. Intervaluation Experience 23

24. Valuation Results – Whole Fund 24

25. Next Steps Polishing off employer results Lots more than at 2010! Good results for Less than average reduction in payroll Well funded at 2010 Cash deficit contributions Not so good for Less well funded at 2010 Bigger than average reduction in payroll 25

26. Managing Your Deficit Open employers - 20 year recovery period Closed employers - look at time until no actives left Funding Strategy Buffer for adverse experience Reduce interest cost Reduce recovery period if affordable Interest cost more than initial deficit contributions If period more than c 20 years If assumptions borne out in practice More now means less later 26

27. 20 Year Recovery Period - £100m of deficit Total Deficit Contributions - £183m 27

28. 10 Year Recovery Period - £100m of deficit Total Deficit Contributions - £140m 28

29. 30 Year Recovery Period - £100m of deficit Total Deficit Contributions - £249m £110m 29

30. 30 Any questions?