1. Social Housing Pension Scheme (SHPS) Employer Forums 2015

2. Welcome

3. Agenda Welcome – Chair Session 1 - Valuation – Paul Coward Session 2 - Benefit Changes – Gary Bradley Comfort break Session 3 - Financial update – Andy O’Regan / Adam Gregory Session 4 - DC update – Andy O’Regan / Gary Bradley Open Forum

4. Session 1 - Valuation Paul Coward, Trustee Services Manager

5. Session overview Re-cap of valuation Funding update – direction of travel Accelerated contributions

6. Re-cap of Valuation

7. Re-cap of 30 September 2014 valuation Past service position 20112014 Deficit£1,035m£1,323m Funding Level 67%70%

8. Reconciliation as at 30 September 2014 (1,035) (1,323) (617) 430 411 215 (54) (630) 11  Opening surplus (deficit)  Interest on liabilities  Expected investment return on the assets  Outperformance of investment return on the assets  Contributions (net of expenses) less benefits accrued  Impact of actual salary and inflation increases  Impact of orphans valued on a solvency basis  Changes to assumptions  Miscellaneous  Closing surplus (deficit)

9. Recovery Plan from 1 April 2016 1.4.1630.9.2030.9.23 30.9.26 Tier 1 AVR 2005 £40.6m pa @ 4.7% Tier 2 AVR 2008 £28.6m pa @ 4.7% Tier 3 AVR 2011 £32.7m pa @ 3.0% Tier 4 AVR 2014 £31.69m pa @ 3.0%  Existing deficit payments remain for each employer  Additional tranche (tier 4)  Tier 4 –Same recovery plan end date as 2011 tranche –Increasing at 3% each year Valuation

10. Other points Existing – Active DB Existing – No Active DB (All DC) From 1 April 2016 0.9% of pensionable earnings Fixed £x’s amount calculated @ 0.9% of pensionable earnings at switch date £1,800 per annum plus £70 per DB member SHPS employer expenses Basis reviewed to be more equitable Closed employer loading Rate reviewed and maintained @ 2.5% of pensionable earnings

11. Expenses Change in method does not increase overall amount recovered by SHPS SHPS Committee agrees expense basis with The Pensions Trust Expenses covers all non-investment fees including:  Trusteeship  Governance  Actuarial and legal  Pension Protection Fund levy  Award winning administration

12. Funding update @ 30 September 2015

13. Direction of travel

14. Where are we now? Key market indicators20142015 Long dated Gilt yield3.0%2.4% Corporate bond yield4.0%3.8% Market implied inflation rate (RPI)3.4%3.2% Key market indicators Assumptions2014 Valuation 2015 Update Pre-retirement discount rate5.9%? Post-retirement discount rate3.3%? RPI assumption3.1%? CPI assumption2.2%? Earnings growth assumption4.2%? Investment returns – most material assumptions On-going low interest rate environment Lower expected rates on growth assets than 2014 Lower inflation expectation than 2014

15. Direction of travel @ 30 September 2015 AssumptionExpected Impact on Funding Level Pre-retirement Discount Rate Post-retirement Discount Rate Inflation (RPI) Inflation (CPI) Increase in Earnings Mortality

16. Accelerated contributions

17. Response to feedback Accelerate payment of deficit contributions Discount equal to long term gilt yield at 30 September 2014 (i.e. 3.0%) This discount rate will remain until the 2017 Valuation Flexibility –Reduce level of RP payments for term –Zero window –Timing

18. Accelerated contributions Payment of £3m will clear regular deficit contributions for period 1 April 2016 to 31 March 2019, plus 62% reduction for month of April 2019 Full deficit contributions recommence from May 2019 Example A – Zero contribution window

19. Accelerated contributions Example B – Reduced payments for 6 years Payment of £3m will reduce payments to 54.5% of regular contributions for 6 years from 1 April 2016 to 31 March 2022 Full deficit contributions recommence from April 2022

20. Accelerated contributions Employer –What funds available? –Impact on the business? –Consider –S75 / future withdrawal likelihood –Accounting / tax implications –Plan ahead / allow time Process –Actuarial advice –Legal agreement –Costs (actuarial / legal / implementation)

21. Session 2 – Benefit changes Gary Bradley, Scheme Manager

22. Session overview Re-cap of benefit changes Consultation End of contracting out

23. Re-cap of benefit changes

24. Benefit changes Employer surveys, meetings, feedback and consultation Number of options proposed, two agreed upon Changes will be introduced from April 2016

25. Increase to NRA Current NRA is age 65 for all sections of the Scheme Increase to age 67 for benefits earned from 1 April 2016 benefits Benefits earned before 1 April 2016 will retain NRA of 65 Members can still retire at age 65 or earlier, with a reduction to the benefits earned from 1 April 2016

26. Decrease to CPI cap Revaluation of deferred pensions and increases to pensions in payment is currently CPI up to 5.0% pa For benefits built up from April 2016 the increase rate will be CPI limited to 2.5% pa Where CPI exceeds 2.5% in a given year, a lower increase will be applied than currently

27. Future service rates as at 30 September 2014 Valuation20112014 equivalent 2014 taking account of benefit changes Change +/- Final Salary -60 th accrual -70 th accrual -80 th accrual CARE -60 th accrual -80 th accrual -120 th accrual 18.5% 16.0% 13.9% 17.2% 13.1% 8.8% 23.7% 20.4% 17.9% 20.8% 15.7% 10.6% 20.6% 17.7% 15.5% 16.7% 12.6% 8.6% +2.1% +1.7% +1.6% -0.5% -0.2% Future service rates excluding expenses / PPF  Effective from 1 April 2016  Include 0.4% allowance for death-in-service benefits but exclude allowance for expenses and PPF levies.  Additional NI from April 2016 (except 120ths CARE) due to cessation of contracting out

28. Consultation

29. The two benefit changes are both ‘listed’ changes Obligation is on the employer to consult Who does the legislation apply to? Legislation around consultation is based on single employer pension schemes A consultation template is available on the Scheme website to assist you

30. Consultation – other changes You may be considering other listed changes e.g. increase to member contributions Maintaining the member’s salary link on final salary service  Remains if driven by the employer  Broken if driven by the member Employers can move members from a closed section ‘down’ to another closed section Employer Form of Authority required by 31 January 2016 or default position applies

31. Consultation Can I take my pre 1 April 2016 benefits at age 65 and my post 1 April 2016 benefits at age 67? What is the default position for the CARE sections because the future contribution rate reduces? Does the reduction in the CPI cap apply across all benefits? Why is the early retirement factor lower for the final salary section?

32. End of contracting-out

33. The Government is removing this option from April 2016 All of the SHPS DB sections are contracted-out, bar the CARE 120ths Both the employer and the member will pay more in National Insurance contributions Current ‘saving’ is 3.4% for employer and 1.4% member, based on the salary between the lower earnings level and upper accrual point

34. End of contracting-out Salary Additional employer National Insurance Additional member National Insurance £20,000£480£200 £30,000£820£340 £40,000£1,160£480 £50,000£1,160£480

35. Comfort break

36. Session 3 – Financial update Andy O’Regan, Executive Scheme Manager Adam Gregory, Scheme Specific Investment Strategies Manager

37. Session overview FRS102 requirements and modeller Financial Assessment and covenant protection Investment update Late payment of contributions

38. FRS102 update

39. New accounting standard Applies for accounting periods commencing on or after 1 January 2015 Earlier adoption is allowed Requirement to disclose Net Present Value of ‘deficit contributions’ in accounts Previously required, under FRS17, to include ‘withdrawal debt’ figure in notes to accounts

40. FRS102 update FRS102 ‘on-line’ tool developed Enables employers to:  Calculate ‘net present value’ of deficit contributions  Download ‘stream’ of deficit contributions  Save ‘disclosure notes’, for agreement with auditors and inclusion in year end accounts Contact Gary Bradley if you need your code

41. FRS102 on-line tool: log in

42. FRS102 on-line tool: inputs

43. FRS102 on-line tool: output Disclosure note: scheme level description

44. FRS102 on-line tool: output Disclosure note: employer level numbers

45. FRS102 on-line tool: output Disclosure note: appendix

46. FRS102 on-line tool: usage

47. Financial Assessment

48. Recent results Financial assessment and covenant protection – recent work Risk RatingHigherMediumLowerTotal 2014 (employers) 70 (15%) 17 (4%) 367 (81%) 454 2015 (employers) 74 (17%) 9 (2%) 359 (81%) 442 KPI ResultsKPI 1KPI 2 20141.2111.12 20151.2210.58 For the recent 2015 assessment, Balance sheet strength (KPI 1) and Affordability (KPI 2) are largely in line with 2014.

49. Financial assessment and covenant protection – current issues Timing Change FRS 102 Affordability focus Future accrual Forward looking Other issues: Budget impact

50. Investment update

51. Investment service (using TPT) Economies of scale & collective wisdom Purchasing power to negotiate fees Access to wide range of investments, liability risk management tools and a dynamic de-risking framework Collective investment governance oversight (custody, monitoring, research etc) Flexible to scheme specific needs Trust policy creates efficient framework Collective sponsor risk appetite can be catered for

52. Investment strategy Current strategy is more robust : Reduction in growth assets from 82.5% to 75% Growth assets are less exposed to one asset class (equities). Growth assets target a similar level of return but with less volatility Greater correlation between assets and liabilities by using Liability Driven Investments (LDI)

53. Investment strategy de-risking stages 1. Reduce growth assets from 82.5% to 80% 2. Reduce growth assets from 80% to 77.5% 3. Reduce growth assets from 77.5% to 75%

54. Investment performance Strong medium term performance LDI assets led the way as yields fell

55. Late payment of contributions

56. Late Payment of Contributions Timescales Contributions should be received by the 19 th of month following deduction In order to meet this date, upload your submission prior to 10 th Late payment of DC contributions will impact member benefits Late payments in the 9 month period 1/10/14 to 30/6/15 406 occurrences of employers paying late High occurrence of repeat offenders – always late 8 employers have been reported to The Pensions Regulator and their members informed in writing

57. Late Payment of Contributions Planned changes from 1 January 2016 Direct Debit will be the only form of contribution collection Administrative charges for late payment of contributions Action Ensure contribution submission submitted before 10 th of month Complete Direct Debit Form ActionAdministration Charge Payment received after 19 th of month following deduction£250 Contributions 30 days late – letter to the employer£250 Contributions 60 days late – letter to the employer£250 Contributions 90 days late – report employer to TPR and notify all members £250 plus £2 per member

58. Session 4 – DC update Andy O’Regan, Executive Scheme Manager Gary Bradley, Scheme Manager

59. Session overview Investment performance Online member access Pension freedoms

60. Investment performance

61. Default fund – Investment strategy through time

62. Investment performance ReturnBenchmarkDifference 2014-164.6%2.0%2.6% 2026-286.6%3.5%3.1% 2035-378.1%5.0%3.1% 2044-468.3%5.0%3.3% Investment return linked to retirement “vintage” Benchmark is CPI + X (where X ranges from 1% for 2014-16 to 4% for 2044-46 vintage) Positive figures in the final column therefore indicate successful outcomes

63. On-line member access

64. On-line access

65. DC on-line member access Valuable communication tool Interactive  Amend contribution rates  Switch investment funds  Request retirement quote Current fund value Pension modeller Investment funds

66. On-line access SHPS DC

67. On-line access SHPS DC

68. On-line access

71. SHPS DC State Pension

72. Pension Freedoms

74. Pension freedoms First announced in March 2014 Budget Fully in place from April 2015 DC members can take part or all of their fund as cash Tax-free element remains at 25% of fund Remaining 75% taxed at marginal rate A DB member with a transfer value in excess of £30,000 must take financial advice before transferring

75. Story so far FCA have produced a report on the first 3 months of the pension freedoms commencing April 2015 Over 200,000 pension policies have been accessed 12,000 new annuities have been set up During the same period in 2013, 90,000 annuities set up It is clear the freedoms have changed the pension landscape

76. Our experience Majority of DC only funds are being cashed in due to small size SHPS members can use their DC fund to offset against their DB PCLS (tax-free cash) Subsequent drop in new annuities An increase in DC transfer-out cases for members over 60 Small increase in DB to DC transfers

77. The Pensions Trust Continue to assist members in setting up an annuity Allow members to take all their fund as cash Will facilitate the transfer of the fund to another provider for drawdown products Is considering the viability of introducing new products, such as a drawdown facility Has amended the default investment fund

78. Open Forum

79. Thank you Thank you for attending Contact details gary.bradley@tpt.org.uk 0113 3942723