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Social Housing Pension Scheme (SHPS) Employer Forums 2015
Welcome
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
Session 1 - Valuation
Paul Coward, Trustee Services Manager
Session overview
• Re-cap of valuation
• Funding update – direction of travel
• Accelerated contributions
Re-cap of Valuation
Re-cap of 30 September 2014 valuation
Past service position
2011 2014
Deficit £1,035m £1,323m
Funding Level
67% 70%
Reconciliation as at 30 September 2014
(1,035)
(1,323)
(617)
430
411
215
(54)
(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)
Recovery Plan from 1 April 2016
1.4.16 30.9.20 30.9.23 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%
Valuation
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
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
Funding update @ 30 September 2015
Direction of travel
Where are we now?
Key market indicators 2014 2015
Long dated Gilt yield 3.0% 2.4%
Corporate bond yield 4.0% 3.8%
Market implied inflation rate (RPI) 3.4% 3.2%
Key market indicators
Assumptions 2014Valuation
2015Update
Pre-retirement discount rate 5.9% ?
Post-retirement discount rate 3.3% ?
RPI assumption 3.1% ?
CPI assumption 2.2% ?
Earnings growth assumption 4.2% ?
Investment returns – most material assumptions
•On-going low interest rate environment
•Lower expected rates on growth assets than 2014
•Lower inflation expectation than 2014
Direction of travel @ 30 September 2015
Assumption Expected Impact on Funding Level
Pre-retirement Discount Rate
Post-retirement Discount Rate
Inflation (RPI)
Inflation (CPI)
Increase in Earnings
Mortality
Accelerated contributions
Accelerated contributions
• 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
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
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
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)
Session 2 – Benefit changes
Gary Bradley, Scheme Manager
Session overview
• Re-cap of benefit changes
• Consultation
• End of contracting out
Re-cap of benefit changes
Benefit changes
• Employer surveys, meetings, feedback and
consultation
• Number of options proposed, two agreed upon
• Changes will be introduced from April 2016
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
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
Future service rates as at 30 September 2014
Valuation 2011 2014 equivalen
t
2014 taking
account of benefit changes
Change+/-
Final Salary
-60th accrual
-70th accrual
-80th accrual
CARE
-60th accrual
-80th accrual
-120th 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%
-0.5%
-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
Consultation
Consultation
• 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
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
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?
End of contracting-out
End of contracting-out
• 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
End of contracting-out
SalaryAdditional 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
Comfort break
Session 3 – Financial update
Andy O’Regan, Executive Scheme Manager Adam Gregory, Scheme Specific Investment Strategies Manager
Session overview
• FRS102 requirements and modeller
• Financial Assessment and covenant protection
• Investment update
• Late payment of contributions
FRS102 update
FRS102 update
• 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
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
FRS102 on-line tool: log in
FRS102 on-line tool: inputs
FRS102 on-line tool: output
Disclosure note: scheme level description
FRS102 on-line tool: output
Disclosure note: employer level numbers
FRS102 on-line tool: output
Disclosure note: appendix
FRS102 on-line tool: usage
Financial Assessment
Recent results
Financial assessment and covenant protection – recent
work
Risk Rating Higher Medium Lower Total
2014 (employers)
70 (15%)
17 (4%)
367 (81%)
454
2015 (employers)
74 (17%)
9 (2%)
359 (81%)
442
KPI Results KPI 1 KPI 2
2014 1.21 11.12
2015 1.22 10.58
• For the recent 2015 assessment, Balance sheet strength
(KPI 1) and Affordability (KPI 2) are largely in line with
2014.
Financial assessment and covenant protection – current
issues• Timing Change
• FRS 102
• Affordability focus
• Future accrual
• Forward looking
Other issues:
• Budget impact
Investment update
Investment service (using TPT)
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)
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%
Investment performance
Strong medium term performance
LDI assets led the way as yields fell
Late payment of contributions
Late Payment of Contributions
• Timescales
• Contributions should be received by the 19th of month
following deduction
• In order to meet this date, upload your submission prior to
10th
• 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
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 10th of
month
• Complete Direct Debit Form
Action Administration Charge
Payment received after 19th 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
Session 4 – DC update
Andy O’Regan, Executive Scheme Manager Gary Bradley, Scheme Manager
Session overview
• Investment performance
• Online member access
• Pension freedoms
Investment performance
Default fund – Investment strategy through time
Investment performance
Return Benchmark Difference
2014-16 4.6% 2.0% 2.6%
2026-28 6.6% 3.5% 3.1%
2035-37 8.1% 5.0% 3.1%
2044-46 8.3% 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
On-line member access
On-line access
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
On-line access
SHPS DCSHPS DC
On-line access
SHPS DC
On-line access
On-line access
On-line access
On-line access
SHPS DC
State Pension
Pension Freedoms
Pension Freedoms
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
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
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
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
Open Forum