1. UK Actuarial Advisory Firm of the Year London Pensions Fund Authority 2013 Actuarial Valuation graeme.muir@bwllp.co.uk mark.norquay@bwllp.co.uk November 2013

2. Agenda Purpose of the valuation How do we do it? Assumptions Results Next Steps Managing Deficits Questions 2

3. Purpose of valuations Many questions! Approach depends on question being asked How much does each employer 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) 3

4. 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 Essentially a collection of over 150 funds Adopt different approaches for different employer types 4

5. 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” 5 Total Cashflows - £17bn

6. How do we do it? Calculations completed at individual employer levelLook 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 Recovery plan to fund any deficit 6

7. Assumptions 7 Price Inflation (RPI) Use Bank of England Inflation Curve Adjust for CPI Salary Increases Initially inflation increasing to CPI plus 1.8% Discount rates Funding : Employer-specific risk-adjusted expected investment return Accounting: Bond yield curve Statistical assumptions Pre retirement :GAD assumptions Post retirement:Club Vita with CMI 2012 (min 1.5%) improvement

8. Open employers 8 Open employers are assumed to carry on indefinitely in the Fund (as currently) Employers are assessed based on strength of covenant Strength of covenant then determines the risk allowance in the discount rate

9. Closed employers No more active members joining means that employers’ leaving dates can be estimated Cessation debt payable on exit is often substantial Can modify the funding target to plan for this the “projected cessation” approach Discount rate before leaving is calculated in the same way as for open employers 9

10. Closed employers

11. Summary of Financial Assumptions AssumptionValue CPI inflation2.7% Pay increasesLong termCPI plus 1.8% Short termCPI Discount rates Ongoing5.9% Employer contributions while participating in the Fund 4.5% to 5.9% Cessation3.1% 11

12. Sensitivity of assumptions Central assumptions 12 £17bn

13. Sensitivity of assumptions What if inflation is 0.5% higher? 13 £20bn

14. Sensitivity of assumptions And what if people live for longer as well? 2.5% long-term improvement instead of 1.5% 14 £23bn

15. Employers’ Contributions 15 Percentage of salaries for new benefits Between 14% and 40% Accrual of new benefits Cash amounts, paid over either average time to leaving or 17 years Funding levels between 50% and fully funded To pay for past service deficit Closed employers only Combination of percentage of salaries and cash amounts, paid over average time to leaving Can be significant if mature active membership To contribute towards expected cessation amount

16. Next Steps Individual employer results Communication and discussion of results Final report 16

17. Managing Your Deficit 17 Funding Strategy Open employers with a strong covenant - 17 year recovery period Mature closed employers may have very short recovery period Reduce perceived risk to the Fund? One-off contribution? Guarantees from Government or parent organisations? Security or escrow account? Reduce recovery period if affordable Buffer for adverse experience Lower pension costs in longer term More now means less later If assumptions borne out in practice

18. 20 Year Recovery Period - £100m of deficit Total Deficit Contributions - £185m 18

19. 10 Year Recovery Period - £100m of deficit Total Deficit Contributions - £140m 19

20. Any questions? 20