Employer Forum 2nd December 2011 1
Welcome and Introduction
Anthony Mayer Chairman
London Pensions Fund Authority
Employer Forum 2nd December 2011 2
The LGPSScheme Developments
London Pensions Fund Authority
Mike TaylorChief Executive
Employer Forum 2nd December 2011 3
Public Sector Pensions -The Main Challenges
• Public and political perception
• Affordability and sustainability
• Life expectancy or longevity
• Inter-generational equity
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Public Sector Pensions
• Funded schemes
• 1.7 million actives– Local Government– MPs
• Unfunded schemes (Pay as You Go)
• 3.3 million actives– Teachers– National Health Service– Civil Servants– Police– Fire-fighters– Armed Forces
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Clamour for Change – why?
• Slow death of private sector defined benefit pensions
• Unfairness– taxpayers paying for public sector pensions
without equivalent pension rights themselves
• Rising cost, particularly longevity
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Government’s priorities
• Reduce the total liability of public sector pensions– Estimated in excess of £1 trillion
• Address the annual structural budget deficit
• Address rising costs
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Government action to date
• Independent Public Sector Pensions Commission– Chair, Lord Hutton– Started July 2010– Interim report October 2010– Final report March 2011
• Changed basis of indexation July 2010 (effective from April 2011)– RPI to CPI– Affects pensions in payment– Saves £1.8bn per annum by 2014/15
Employer Forum 2nd December 2011 8
Government action to date (contd)
• Budget Spending Review (October 2010)– Increases in member contributions from
April 2012– Average 3.2% by 2014/15
• £2.8 billion per annum including £900 million for LGPS
• No increase for lowest paid members
• Review state retirement age
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Affordability & sustainability
• All pension funds are sustainable if …– Increase contributions – pay more– Reduce benefits – get less– Increase retirement age – work longer
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• Lord Hutton’s report
• “Hutton report welcomed as positive and sensible by London Pensions Fund Authority”
• “Public sector schemes risk collapse with contribution increase”
• “Treasury proposals could break LGPS before Hutton can fix it, LPFA warns”
New public sector pension schemes
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Lord Hutton’s conclusions
• Retain defined benefit
• Switch from final salary to career average
• Protect accrued rights
• Increase retirement age
• Review employee / employer balance
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Lord Hutton’s conclusions (contd)
• Shared risk and automatic regulation
• Independent scrutiny
• Improved governance
• Abolition of fair deal
• New legislative framework
• Implement by 2015/16
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Lord Hutton’s conclusions
for LGPS
• Retain LGPS funded status
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Future Local Government Pension Scheme
• Statutory scheme– Career Average, Defined Benefit– Retirement Age raised in line with State
Retirement Age • Now 65• 66 by 2020• 67 by 2026
– Accrual may be 1/60th or lower – perhaps 1/70th
• Other public sector schemes– Similar
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Changed Indexation
• RPI to CPI–Already accounted for in valuations–Subject to Judicial Review (Autumn 2011)
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Increased Employee Contributions
• No agreement between Treasury, Cabinet Office, Trades Unions
• Major concerns about members opting out– LGPS can be treated differently
• New discussions between CLG, Employers (LGA), Trades Unions
• Consultation on how to implement – Smaller increase in contributions – Reduce benefits by changing accrual rate– Bring forward change in retirement date
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Key Issue
Either• Single change
– Merge employee contribution rate issue with implementation of new scheme
– New scheme from April 2014
Or• Two changes
– employee contribution rate rises from April 2012
– New scheme from April 2015
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Objectives
• Long term sustainability
• Maintain the fund for future entrants – Prevent mass opt outs
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Future Challenges
• Are the new schemes affordable?– Will it last for a generation?
• Retaining membership– Explaining the scheme
• Declining numbers in workforce
• Impact on Investment Strategy
• Ageing population
• Further longevity improvements
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Prerequisites for reform
• Comprehensible to scheme members
• A fair pension– Pension seen as key part of members’
pay and reward
• Good communication by employers and administrators
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Investment Issues
• Opt outs will lead to rapid maturing of the schemes
• Less scope for investment risk
• More Bonds, Liability Driven Investment strategies
• Less equities, less illiquid alternative assets
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Investment Review
London Pensions Fund Authority
Vanessa JamesDirector of Investment
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VOLATILE!
Employer Forum 2nd December 2011 24
The Last Twelve Months
• European Crisis
• US downgraded from AAA debt status, Republicans and Democrats can’t agree on deficit reduction.
• China growing too fast, then too slowly. China asked to help fund Europe’s problems!
Employer Forum 2nd December 2011 25
European Crisis
• Markets have continued to test inadequate European lender of last resort provisions pushing bond yields higher.
• The scale of the non domestic holding of Italian debt requires more money to guarantee than is even being dreamed of in official European communiqués.
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• Politicians are having to take tough decisions that are not in their country’s SHORT term interest and so are not popular
……as a result they are continually behind the curve.
• All asset markets are reacting to the latest piece of news causing high volatility and are growing tired of the politicians lack of decisive action
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European Crisis
What needs to be done short term:
1.The ECB(?) must guarantee all deposits in European banks
2.The ESF must gear up to 4x the sizes being spoken of at the moment
3.There needs to be a severe restructuring of debt
4.As well as worrying about deficit reduction, lack of economic growth needs to be dealt with as a priority…….Germany a problem here
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European Crisis
What needs to be done longer term:
• Fiscal policy must be closely aligned across those countries in the Euro
• Myriad of possible solutions here
True fiscal integration----------------------only the old DM block
Uncharted territory means an uncomfortable ride and lower growth
Employer Forum 2nd December 2011 29
Is there any good news?
• The USA is down but not out
• The Far East and South America growing more strongly but growth is slowing here too
• Corporate sector in the best shape.
• Interest rates remain low and QE being repeated.
• The most likely and optimistic economic outcome is muddle through.
• Lower returns expected from all asset classes over the next 3-5 years
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What the Fund Holds
Distribution at 30th September 2011:
Asset Class % of Fund
Global and private equity 44
PDF LDI and active bonds 37
Diversified Assets 17
Cash 2
Total 100
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So is the Strategy Fit for Purpose?
Fund cash positive for ? Years
• What effect will the proposed increased contributions have on the likely cash flow?
• The Investment Committee will be meeting to re-examine strategy based on new cash flow projections from the actuary once the new contribution rates are agreed
Employer Forum 2nd December 2011 32
Something for you now
The LPFA fund totalled £3861m on Sept 30th 2010.
Given all that has happened what was the size at the end of September 2011?
- 20% to -10%, -10% to 0, 0 to +10%
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Coffee Break and Networking
Employer Forum 2nd December 2011 34
Employer Covenant Checks
Tony WilliamsEmployer Services Team
Manager
London Pensions Fund Authority
Employer Forum 2nd December 2011 35
Agenda
• Background• Legal Requirements • Employer Responsibilities • LPFA Checks • Next Steps
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Reasons
• Prevent liabilities falling to other employers
• Improve risk management
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Causes
• Becoming insolvent
• Changes to Government funding– Grant reductions/grant removal
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Legal Requirements
LPFA
• Statutory Duty to maintain and administer the fund for both employers and fund members
• LPFA have a duty of care to look to best protect the pension fund.
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Legal Requirements
Employers
• To disclose material events to LPFA under:– The Occupational Pensions Scheme
(Scheme Administration) Regulations 1996
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Reportable Events
• Any material change• Matters likely to affect participation. • Change in status
– Take over– Amalgamation, liquidation or receivership– Change in the nature of business – Breach of banking covenant– Cease trading in the UK
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LPFA Checks/Controls
• Credit rating report.
• Monitoring companies house.
• Web tracking – Google Alerts.
• Annual Declaration form.
• Engaging with employers.
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More Detailed Checks
• Cessation valuation payment plan
• Valuation recovery spread period
• OR when LPFA believe appropriate
CHECKS •Full review of accounts•Additional security
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Insolvency
What happens?
• Maximise monies through liquidation process
• Appoint new liquidators to protect fund
• Seek specialist legal advice
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Next Steps
• Report to our Board
• Employer updates
• Encourage engagement and participation
Employer Forum 2nd December 2011 45
Summary
• Background
• Legal Requirements
• Employer Responsibilities
• LPFA Checks
• Next Steps
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THERE ARE ALWAYS RISKS
but by all employers working together, we can minimize these!
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Automatic Enrolment
Andrew Fleming The Pensions Regulator
Employer Forum 2nd December 2011 48
Performance Administration Strategy
Mike AllenDirector of Pensions
London Pensions Fund Authority
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The Background
• Consultation with employers November 2009 to January 2010
• Employers comments taken on board February 2010
• Final strategy issued and employers signed up April 2010 onwards
• LPFA employer liaison officer appointed
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The Reasons Behind the Strategy
• Clarify employer and LPFA roles and responsibilities
• Improved data flows and data accuracy
• Improved service for scheme members
• Preparing for future challenges – new scheme, auto-enrolment, valuation
Employer Forum 2nd December 2011 51
Has the Strategy been Successful?
• Constructive feedback taken on board by LPFA – improved engagement
• Ability for employers to view on-line forms submitted and progress made
• Improved processing and elapsed times
• End of year error rates reduced significantly
• Contributions paid on time
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Facts and Figures
• On line forms submitted:July to September 2009 – 95 formsJuly to September 2011 – 2,400(98%+)
• End of year error rates:Year ending 31/3/10 – 20%Year ending 31/3/11 – 12%
• Contributions paid accurately and on time:April 2011 – 31 (late/inaccurate/no form)October 2011 - 9 (late/inaccurate/no form)
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Facts and Figures continued
• Average elapsed time from date of receipt to date of completion:
09/10 10/11 11/12New joiners 23 10 5Early leavers 46 28 23Employer estimates 8 6 6
• Target time from date of receipt of all relevant information to date of completion:
09/10 10/11New joiners 10 2Early leavers 10 8Employer estimates 5 3
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What’s Next?
• Encourage use of data match facility
• Reports on performance available on-line at www.yourfund.org.uk
• Employer feedback
• Continued close working through challenging times
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Finally
Thank You for all your efforts!!!
Employer Forum 2nd December 2011 56
Questions