1. Cornwall Pension Fund 2016 valuation Catherine McFadyen FFA
Steven Scott FFA
15 November 2016
Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

2. Other Scheduled bodies
Cornwall Pension Fund
Cornwall Council
(c. 70% of Fund)
Contractors
Admission Bodies
Town & Parish Councils
Academies
Other Scheduled bodies
Ring-fenced employer assets and liabilities

3. What are we going to cover?
Valuation overview
Inter-valuation experience
Whole Fund results
Employer funding strategies
Affordability
Accounting / valuation

4. Valuation overview

5. Review the Funding Strategy Statement (FSS)
Why do we do a valuation?
Compliance with legislation
Set employer contribution rates
Determine money needed to meet accrued liabilities
Calculate solvency (“funding level”)
Monitor experience vs. assumptions
Manage risks to Fund and employers
Review the Funding Strategy Statement (FSS)

6. 2016 progress report Event Timescale Progress
Data received and cleansed
June to August 2016
Draft FSS issued to officers
8 September 2016
Whole fund results issued to officers
30 September 2016
Submission of results to Scheme Advisory Board
Employer results issued to officers
12 October 2016
Whole fund results discussed with Pensions Committee
14 October 2016
Employer Annual General Meeting
15 November 2016
Final employer results and FSS agreed
Early 2017
Sign off valuation report and R&A
31 March 2017

7. Valuation - the ultimate objective
How much money does the Fund need, and how should it be invested, in order to be able to meet the promised benefits?
Assets Which ones? How is it done efficiently? ?
What are the liabilities?

8. Meeting the objective Liabilities Assets Liabilities Future
Structure
Managers
Liabilities
Assets
Future
outperformance
Future contributions
Liabilities
Assets

9. A balancing act Higher expected investment returns …
… mean less cash conts required from employer …
… but also mean more risk to the Fund …
… so we need to factor in employer covenant profile
Cash conts
Invest returns
Funding
Volatility

10. Inter-valuation experience

11. Whole fund valuation results
31 March 2013
Active
757m
Deferred
274m
Pensioner
772m
Total liabilities
1,803m
Assets
1,343m
Deficit
(460m)
Funding level
74%

12. Experience since 2013 (assets)
Asset returns have been lower than expected…

13. Experience since 2013 (yields)
… and expectations for future returns are lower than 2013

14. Longevity experience
Longevity experience in-line with expectations

15. 2016 valuation impact (baseline)
The impact of adopting CV2016 assumptions (which reflect the emerging Club Vita experience) is to decrease the value placed on liabilities by 1.1%. This decrease reflects the following:
Refinements to VitaCurves to reflect the latest emerging insights – for example we have recently been able to incorporate additional information on very high earners.
Extra data available to Club Vita which was not available when identifying the characteristics of your members, and so the VitaCurves, used for the funding valuation
Actual emerging longevity improvements compared to those assumed in your latest funding valuation
Impact of your Fund’s experience since the 2013 valuation
Reduction in the value of the liabilities at the 2016 valuation
Source: 2015 Vita Monitor

16. Membership experience
Pay growth
Lower than expected (3.2% vs 4.9%)
Does vary across employers
Pension increases (pension increase orders)
Expected 2.5% p.a. (7.7%)
Actual 2.7%, 1.2%, 0.0% (3.9%)
Movements
Fewer ill health retirements than expected
Fewer early leavers than expected
Deaths experience broadly in line with assumption
50:50 take-up
Lower that expected

17. Whole Fund results

18. Changes to the 2016 valuation financial assumptions
Asset Outperformance Assumption (AOA)
Increase to 1.7% p.a. (from 1.5% p.a.)
Salary growth assumption
Continued public sector pay growth
Run off of pre2014 final salary linked liabilities
Reduce to CPI plus 0.1%
RPI / CPI gap
Increase to 1.0% p.a. (from 0.8% p.a.)

19. Key assumptions for funding target
2013 valuation
2016 valuation
Derivation of assumption
Discount rate (assumed future investment return)
4.5%
3.9%
Gilts plus prudent asset out-performance assumption (AOA)
At 2013: AOA = 1.5% p.a.
At 2016: AOA = 1.7% p.a.
Long term pay growth
4.3%
2.2%
At 2013: RPI + 1.0%
At 2016: CPI + 0.1%
Pension increases (CPI)
2.5%
2.1%
At 2013: CPI = RPI - 0.8% At 2016: CPI = RPI - 1.0%
50:50 take up
10% 5%
Lower than anticipated take up
Longevity
ClubVITA with CMI 2010 model for future improvements
ClubVITA with CMI 2013 model for future improvements
2013 not 2015 in order to remove volatility experienced in last two years

20. Whole fund valuation results
31 March 2013
31 March 2016
Active
757m
696m
Deferred
274m
399m
Pensioner
772m
866m
Total liabilities
1,803m
1,961m
Assets
1,343m
1,475m
Deficit
(460m)
(486m)
Funding level
74%
75%
Increase in funding level, and deficit, at the 2016 valuation

21. Why has the funding position changed?£m

22. Broad impact on surplus / (deficit) at 31 March 2016
Financial experience
Broad impact on surplus / (deficit) at 31 March 2016
Increase in AOA
c£70m
Increase in RPI-CPI gap
Lower long term salary growth
c£120m
Change in underlying market conditions
(£260m)
Total gain (loss) from financial experience
c£1m

23. Employer Funding Strategies

24. What is the Funding Strategy?
The funding strategy is set out in the Funding Strategy Statement (FSS)
“The FSS focuses on how employer liabilities are measured, the pace at which liabilities are funded, and how employers or pools of employers pay for their own liabilities.”
“The FSS is a summary of the Fund’s approach to funding its liabilities, and this includes reference to the Fund’s other policies.”
The FSS is the Cornwall Pension Fund’s funding blueprint

25. Why is the FSS important to employers?
The FSS helps employers understand
how their contributions are calculated;
how these are fair by comparison to other employers in the Fund; and
in what circumstances the employer might need to pay more.
The revised FSS will be available shortly

26. Setting funding targets at 2016
Understand employers
What is the funding target?
Time horizon
Probability of success

27. Why doesn’t everyone pay the same rate?
No actives
Term
Maturity
Security
Size
Guarantor
Closed to new entrants
Planning to exit
Funding level
Employers are a diverse group with different objectives

28. Historic approach to funding plans
Actuary & Fund agree one set of assumptions
Actuary calculates contribution rates
Based on the assumption that future conditions are certain

29. Risk based approach: recognise uncertainty

30. Setting employer contribution rates
Successful outcomes
Unsuccessful outcomes
Year
Source: Hymans Robertson, sample fund

31. Setting employer contribution rates
70% of outcomes above 100% funding
Year
Source: Hymans Robertson, sample fund

32. Two elements to contribution rates
Expressed as a % of pay
Cost of future benefits
Monetary amount in most cases
“Primary Rate”
Adjustment to target full funding
“Secondary Rate”

33. Why pay monetary deficit amounts?
Deficit recovery:
10% of pay
Payroll of £100,000
Payroll of £60,000
Over 3 years
Deficit recovery = £10,000
Deficit recovery = £6,000
Deficit does not reduce in line with falling payroll
Monetary amounts ensure the deficit is still repaid

34. Risk-based approach for all employers
Contribution Stability Mechanism
Risk-based approach
Prob of success = 66%
Prob of success = 75%
Low risk employers
Other Admitted Bodies
Contractors
Risk-based approach
Prob of success = 80%
High risk employers

35. A balancing act Higher expected investment returns …
… mean less cash conts required from employer …
… but also mean more risk to the Fund …
… so we need to factor in employer covenant profile
Cash conts
Invest returns
Funding
Volatility

36. Liabilities (i.e. asset target to meet all benefits eventually)
In principle
Conts.
Returns
Liabilities (i.e. asset target to meet all benefits eventually)
Share of assets
Returns
Timeframe = x years

37. Varying the risk/probability - Green
Conts.
Returns
Liabilities (i.e. asset target to meet all benefits eventually)
Share of assets
Green – 66% probability
Returns
Employer profile links to contributions

38. Varying the risk/probability - Amber
Conts.
Returns
Liabilities (i.e. asset target to meet all benefits eventually)
Share of assets
Amber – 75% probability
Returns
Employer profile links to contributions

39. Varying the risk/probability - Red
Conts.
Returns
Liabilities (i.e. asset target to meet all benefits eventually)
Share of assets
Red – 80% probability
Returns
Employer profile links to contributions

40. Affordability

41. Why asset returns matter
Total contributions = 625% of pay
Total pensions = 1,250% of pay
Asset returns
Annual Pension =
50% of pay
Annual Contributions =
25% of pay
Age 40 65 90
25 years
25 years
Asset returns fill the ‘gap’

42. Cost of the LGPS in this environment
Change
Change in cost
Employer cost of 2014 scheme (best estimate)
Original cost envelope -
13.0% of pay
Revaluation/transfers
1.3%
14.3% of pay
Minimal take-up of 50:50 option
1.0%
15.3% of pay
Change in GAD net discount rate due to lower GDP estimate
1.1%
16.4% of pay
Lower for longer change in net discount rate?
1.8%
18.2% of pay
Is the 2014 LGPS still affordable?

43. Valuation v Accounting

44. Valuation / Accounting differences
Purpose
Reflect a ‘true and fair’ view of the pension obligation
Ensure sufficient assets to meet benefits
Financial Assumptions
Largely prescribed
Scheme specific
Basis
Best estimate
Prudent
Application
Employer accounts
Regulatory
Frequency
Annual
Triennial
Accuracy
Approximate update permitted
Full data required
Accounting figures do not affect the contributions payable

45. FRS102 assumptions
1.2% pa fall in real corporate bond yields – increase in liabilities

46. FRS102 assumption at 31 August 2016
2016 valuation
(31 March 2016)
(31 August 2016)
Default FRS 102
Discount
3.9%
2.9%
2.1%
Long term pay growth
2.2%
4.1%
Pension increases (CPI)
2.0%
Approx impact on liabilities
+ 15%/20%
+ 40%/50%
Yields have fallen considerably since 31 March 2016
Lower discount rate under FRS102 (high quality corporate bonds)
Reduction in salary growth assumption at the 2016 valuation

47. Any questions?

48. Reliances and Limitations
This presentation is addressed to Cornwall Council as the Administering Authority of the CornwalL Pension Fund and will be shared with employers participating in the Cornwall Pension Fund at the employer forum on 15 November This has not been provided for the purposes of any other party and Hymans Robertson LLP makes no representation or warranties to any third party as to the accuracy or completeness.
This presentation discusses the 2016 valuation results for the Cornwall Pension Fund and current issues in the LGPS and was prepared purely for illustration to employers. Hymans Robertson LLP accepts no liability for any other purpose of this presentation.
The following Technical Actuarial Standards* are applicable in relation to this presentation and have been complied with where material:
TAS R – Reporting;
TAS D – Data;
TAS M – Modelling; and
Pensions TAS.
* Technical Actuarial Standards (TASs) are issued by the Financial Reporting Council and set standards for certain items of actuarial work, including the information and advice contained here.