1. The London Borough of Merton Pension Fund Actuarial update AGM September 2012 Alison Hamilton FFA

2. Agenda LGPS 2014 What’s been “agreed to be proposed” Why CARE? The Robin Hood Approach Impact on Employers 2013 Valuation outlook 2

3. Lord Hutton’s Recommendations Move to career average for future service Retain final salary/retirement age etc link for past service Future retirement age to link to State Pension Age Cost ceilings for employers/tax payers Higher member contributions Sorted by 2015 3

4. LGPS 2014 – the headlines Career Average Formula 49th accrual / CPI revaluation Pension age will be Stage Pension Age 65 to 68 at the moment No increase in average member contribution Higher rate tax payers to pay more though Savings for employers 1% to 2% of pay on average but will vary quite a bit LGPS Lite Half accrual for half contributions Outsourced employees will stay in LGPS Broadly comparable route now a dead duck 4

5. Public Service Scheme Proposals SchemeAccrual Rate RevaluationNotes 2 November Reference Scheme 60thsAverage Earnings From 2015 Average 3.2% member contribution increase phased in from 2012 to 2015 Civil Service44thsCPI Teachers57thsCPI + 1.6% Health Service54thsCPI + 1.5% LGPS49thsCPIFrom 2014 Average member contribution the same but higher paid to pay more “50/50” option 5 Trade accrual and revaluation for same cost (ish) Not quite there yet

6. Why CARE?

7. Scheme Design Principles Replacement ratios Post retirement income -v- pre retirement income Risk and cost sharing Predictability of post retirement income Employee and employer split Ability to bear risk and cost 7

8. Replacement Ratios What are pension schemes? Income replacement schemes? Savings schemes? Defined contribution schemes Most definitely savings schemes Arguably not pension schemes at all Defined benefit schemes Most definitely income replacement schemes 8

9. Income Replacement Ratios Theory is post retirement income should be related to pre retirement income levels Poorer need close to 100% replacement Wealthier can get by with less than 100% However also a function of actual pre retirement income Historically 2/3rds deemed the right average level 9

10. Replacement ratios Final salary schemes Targets a defined replacement ratio Depending on length of service Hutton recommends replaced with CARE Still targets a defined replacement ratio Bit less obvious Mostly on grounds of fairness “High -v- low fliers” Better link between contributions paid and benefits received 10

11. CARE Schemes New unit of measurement Forget “service”! Think annual chunks/blocks of pension and pension pot Need a spreadsheet...... Key difference Pension a proportion of total or average pay rather than final pay The “C” and the “A” Past earnings “revalued” The “R” and the “E” 11

12. How it works YearSalary Pension Pot at Start% Pension Earned Pension Pot at End"Interest" Total Pension% Salary 1£20,000£0 pa2% 2 3 4 5 10 20 Accrual2% (1/50 th ) Pay Increases 3% Revaluation3% 12

13. How it works YearSalary Pension Pot at Start% Pension Earned Pension Pot at End"Interest" Total Pension% Salary 1£20,000£0 pa2%£400£400 pa£12£412 pa2% 2 3 4 5 10 20 13 Accrual2% (1/50 th ) Pay Increases 3% Revaluation3%

14. How it works YearSalary Pension Pot at Start% Pension Earned Pension Pot at End"Interest" Total Pension% Salary 1£20,000£0 pa2%£400£400 pa£12£412 pa2% 2£20,600£412 pa 3 4 5 10 20 14 Accrual2% (1/50 th ) Pay Increases 3% Revaluation3%

15. How it works YearSalary Pension Pot at Start% Pension Earned Pension Pot at End"Interest" Total Pension% Salary 1£20,000£0 pa2%£400£400 pa£12£412 pa2% 2£20,600£412 pa2%£412£824 pa£25£849 pa4% 3£21,200£849 pa2%£424£1,273 pa£38£1,311 pa6% 4£21,800£1,311 pa2%£436£1,747 pa£52£1,799 pa8% 5£22,500£1,799 pa2%£450£2,249 pa£67£2,317 pa10% 10£26,100£4,695 pa2%£522£5,217 pa£157£5,374 pa20% 20£35,100£13,330 pa2%£702£14,032 pa£421£14,453 pa40% 15 Accrual2% (1/50 th ) Pay Increases 3% Revaluation3% A final salary scheme is a CARE Scheme with actual salary increase revaluation

16. Why Career Average? High Fliers -v- Low Fliers 16

17. Is the new LGPS better for me? 17

18. Is the new LGPS better for me? 18

19. Is the new LGPS better for me? 19

20. Conclusions Shorter serving staff Those with less career progression LGPS 2014 better for Longer serving staff Those who end up near the top of the pile LGPS 2008 better for Those already at the top of the pile! LGPS 2014 better for Better link between contributions paid and benefits payable All in all a fairer system 20

21. Impact on Merton Pension Fund We can do the calculations 1-2% of payroll The benefits cost roughly the same The link to SPA reduces the over all cost Depends on membership profile and funding assumptions Above excludes any benefit of “50/50” lite option Employer cost roughly halves for those who opt for 50/50 If 10% of payroll opt for “50/50” Further saving of c. 0.5% for the Fund Variation between employers within Funds 21

22. What about the past? 22

23. Summary The 2013 valuation is just around the corner Benefits built up to date are the same New contribution rates may reduce slightly For future benefits For employers Not employees Still a deficit to fund Still some decisions to be agreed for 2014 scheme 23

24. Questions?