Agenda item

The Committee is invited to go into exempt session before discussing Exempt Appendix 2.

The Investment Manager presented the report.

She said that the Actuary would complete the valuation report, subject to further data which might emerge from the valuation, by 31^st March 2017. Section 5 of the report summarised the outcome of the valuation and gave details of actions to be taken to mitigate employer risk. A report on the financial covenants  of the employers would be presented to the committee annually starting from 2017/18. Exempt Appendix 2 gave an update on the Funds management of the risk associated with Community Admission Bodies.

In reply to a question from a Member she said that until 2006Community Admission Bodies were admitted to the Fund without guarantees. Since that date the Fund has been able to require the outsourcing employer to provide a guarantee and its policy has required a guarantee. The provision of a guarantee in respect of all Admission Bodies was made mandatory by the 2013 Regulations.

The Fund’s Actuary, Paul Middleman, and officers replied to questions from Members.

Q: Has longevity plateaued?

A: The rate of improvement is tailing off. It is yet to be seen whether it will reverse. References to longevity in the valuation relate to members of the Fund, who are rather different from the general population. There is some falling back, but the improvement rate of the longevity of males is still catching up with that of females.

Q: Can you explain how the three factors identified in the table of changes to the Future Service Rate (FSA) (agenda page 58) operate?

A: Change in membership profile can be because of gender, but the dominant factor is age. The older the member, the more expensive it is to provide benefits to them. Our assumption is that on average the membership will be older, so there will be an increase in the cost of providing benefits. Change in financial and demographic assumptions is a combination of two elements. The financial element comprises mainly the discount rate, the outlook for future returns based on market conditions and the term of future service liabilities. The discount rate for future service has been reduced, resulting in an increase of 1.2% of pay per annum for the FSR. The demographic assumption was that on average scheme members might live a month less. The third factor was the 50/50 scheme introduced in 2014. An allowance for this scheme was put into the 2013 valuation for the FSR of the Unitary Authorities, but of course at that time there was no experience of who would take it up. This allowance has been removed from the 2016 valuation, resulting in a further 0.5% increase in the FSR.

Q: If after Brexit in 2019 there is a hit to the economy, quite a few employers will struggle in to achieve their recovery periods and may approach the Fund for an extension. Is this not something we should be thinking about now?

A: The intention is to get the average recovery period down to 15 years because the scheme is an open one. We will have to wait and see if there is any adverse impact to Brexit. An important factor is the level of debt. We do not want to take a very high debt on future investments that is triggered post Brexit and then also extend the recovery period. The balance is a difficult one to strike, and it is hard to identify specific actions that we should take.

Q: I am concerned about how increases in employer contributions are phased in. Once raised, they are not going to come down. Are the phased increases really necessary in view of the improved funding position?

A: Employer contributions have been raised by the minimum, just 0.5% We always consider affordability very carefully. Even though the funding level has improved, cash flow has to be maintained.

Q: There is discussion about people being required to work in their 70s, so employers will have to continue to pay pensions contributions on their behalf. At the same time if they are working, they will not be receiving their pensions. Have any calculations been done about the net effect of this?

A: We do an analysis of when people are retiring and work out the average, so the fact that people are working longer is included in the calculations. If people work past state pension age, on a cost basis they get their benefits in hand and that is taken into account. A more important factor is that the longer people work, the more likely they are to take ill-health retirement, and that is factored in as well.

RESOLVED:

1. To note the outcome of the 2016 actuarial valuation exercise.

2. To note the actions taken to monitor and mitigate employer risk.