Mercer Human Resource Consulting Limited is regulated by the Financial Services Authority and is a member of the General Insurance Standards Council Registered in England No Registered Office: Telford House, 14 Tothill Street, London SW1H 9NB Chris Hull FIA NORTH YORKSHIRE PENSION FUND 2004 Valuation Initial Results 25 October 2004

2 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

3 Mercer Human Resource Consulting Purpose Review contribution programme Contribution programme Funding strategy/ principles Deficit recovery period Investment strategy/ structure Employer consultation

4 Mercer Human Resource Consulting  Ongoing “future service” cost – depends on current employees  “Past service” adjustment – offset or addition depending on assets compared to liabilities – depends on past experience LGPS Funding

5 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

6 Mercer Human Resource Consulting Key Financial Assumptions 2001 valuation Pension increases = inflation Salary increases = inflation + 1.5% p.a. Investment return = gilt yields + 1.0% p.a.

7 Mercer Human Resource Consulting 2001 Valuation Employer Contributions Cost of ongoing accrual17.4% Less Employee contributions5.8%11.6% Plus Adjustment for deficit6.1% Average employer rate17.7% (excluding early retirement payments) Deficit spread over future working lifetime of 15 years.

8 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

9 Mercer Human Resource Consulting Integrated funding and investment strategy to target agreed funding level over a period Achieved through combination of “prudent” level of investment out-performance, increased contribution input and/or extended recovery Link out-performance assumptions to investment strategy adopted and liability profile 2004 Funding Strategy - Targeted Funding

10 Mercer Human Resource Consulting Equity Risk Premium Summary of historical annual return differential between UK equities and UK Government gilts Actual equity risk premium from 1903 to 2002

11 Mercer Human Resource Consulting Equity Risk Premium Expected outperformance of equities over gilts Prudence or best estimate? Confidence in the future? Variation with Market Conditions? Valuation Model:

12 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

13 Mercer Human Resource Consulting Membership 31 March March ,494 44,849 12,221 22,134 35,745 9,650 7,697 18,398

14 Mercer Human Resource Consulting Financial background Asset returns

15 Mercer Human Resource Consulting 2004 Valuation Key Assumptions Fixed interest gilt yields4.6% Index linked gilt real yields2.3%1.8% Implied inflation2.3%2.8% Asset out-performance -pre-retirement1.0%2.0% -post-retirement1.0%0.5% Real salary growth assumption1.5%1.75%

16 Mercer Human Resource Consulting 2004 Valuation Financial Assumptions Past Service (current yields basis) Future Service (long term basis) Pension increases2.8%2.5% Earnings increases4.55%4.25% Investment return: pre-retirement6.6%6.5% post-retirement5.1%6.5% Assetsmarket value

17 Mercer Human Resource Consulting 2004 results MV of assets£765.8m Past service liabilities£1,290.3m Deficit£524.5m Funding level59.4% Future service rate (After removal of Rule of 85 terms) 10.4%

18 Mercer Human Resource Consulting 2004 Results Analysis of past service shortfall 2004 funding level 59.4% (79.5% 2001)

19 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

20 Mercer Human Resource Consulting Effect of Extended Deficit Recovery

21 Mercer Human Resource Consulting 2004 Results Average Employer Contributions 20 year Recovery 25 year Recovery 30 year recovery Future service (assumes removal of Rule of 85 terms) 10.4% Deficit Recovery contributions10.1%8.3%7.1% Average required rate (excluding early retirement costs) 20.5%18.7%17.5% 2001 average target rate was 17.7% of pensionable payroll 30 year period determined by PFC as maximum allowable

22 Mercer Human Resource Consulting Next Stages Consultation with employers on key issues – Deficit recovery – Bespoke investment strategies Process individual employer results Consider phasing of contribution increases where required

23 Mercer Human Resource Consulting Agenda Purpose of valuation Review 2001 results Key assumptions and link to Investment Strategy 2004 Results Deficit Recovery FRS17

24 Mercer Human Resource Consulting FRS17 - Overview Detailed disclosure requirements Charge cost of accruals, not contributions Surplus/deficit not amortised through Revenue account  Balance sheet asset/liability

25 Mercer Human Resource Consulting FRS17 comparison with actuarial valuation FRS17 More prescriptive Underlying discount rate = currently 3½% real determined by HM Treasury 2004/5 SORP changing to Corporate Bond yields basis (approach to transition not yet certain) Immediate recognition of past service effects Includes unfunded benefits (e.g. CAY)

26 Mercer Human Resource Consulting FRS17 comparison with actuarial valuation The Valuation Long term funding plan Assumptions not prescribed, and can include allowance for equity outperformance Flexibility in treatment deficits – Length of recovery period – Phasing of contribution increases