Welcome and Introduction

1. Welcome and Introduction Anthony Mayer Chairman London Pensions Fund Authority

2. The LGPSScheme Developments Mike Taylor Chief Executive London Pensions Fund Authority

3. Public and political perception Affordability and sustainability Life expectancy or longevity Inter-generational equity Public Sector Pensions -The Main Challenges

4. 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 Public Sector Pensions

5. Slow death of private sector defined benefit pensions Unfairness taxpayers paying for public sector pensions without equivalent pension rights themselves Rising cost, particularly longevity Clamour for Change – why?

6. Reduce the total liability of public sector pensions Estimated in excess of £1 trillion Address the annual structural budget deficit Address rising costs Government’s priorities

7. 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 Government action to date

8. 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 Government action to date (contd)

9. All pension funds are sustainable if … Increase contributions – pay more Reduce benefits – get less Increase retirement age – work longer Affordability & sustainability

10. 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

11. Retain defined benefit Switch from final salary to career average Protect accrued rights Increase retirement age Review employee / employer balance Lord Hutton’s conclusions

12. Shared risk and automatic regulation Independent scrutiny Improved governance Abolition of fair deal New legislative framework Implement by 2015/16 Lord Hutton’s conclusions (contd)

13. Retain LGPS funded status Lord Hutton’s conclusions for LGPS

14. 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

15. RPI to CPI Already accounted for in valuations Subject to Judicial Review (Autumn 2011) Changed Indexation

16. 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

17. 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

18. Objectives • Long term sustainability • Maintain the fund for future entrants – Prevent mass opt outs

19. 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

20. 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

21. 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

22. Investment Review Vanessa James Director of Investment London Pensions Fund Authority

23. VOLATILE!

24. 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! The Last Twelve Months

25. 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. European Crisis

26. 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

27. What needs to be done short term: The ECB(?) must guarantee all deposits in European banks The ESF must gear up to 4x the sizes being spoken of at the moment There needs to be a severe restructuring of debt As well as worrying about deficit reduction, lack of economic growth needs to be dealt with as a priority…….Germany a problem here European Crisis

28. 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 European Crisis

29. 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 Is there any good news?

30. What the Fund Holds Distribution at 30th September 2011:

31. 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 So is the Strategy Fit for Purpose?

32. 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% Something for you now

33. Coffee Break and Networking

34. Employer Covenant Checks Tony Williams Employer Services Team Manager London Pensions Fund Authority

35. Background Legal Requirements Employer Responsibilities LPFA Checks Next Steps Agenda

36. Prevent liabilities falling to other employers Improve risk management Reasons

37. Becoming insolvent Changes to Government funding Grant reductions/grant removal Causes

38. 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. Legal Requirements

39. Employers To disclose material events to LPFA under: The Occupational Pensions Scheme (Scheme Administration) Regulations 1996 Legal Requirements

40. 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 Reportable Events

41. Credit rating report. Monitoring companies house. Web tracking – Google Alerts. Annual Declaration form. Engaging with employers. LPFA Checks/Controls

42. Cessation valuation payment plan Valuation recovery spread period OR when LPFA believe appropriate CHECKS Full review of accounts Additional security More Detailed Checks

43. What happens? Maximise monies through liquidation process Appoint new liquidators to protect fund Seek specialist legal advice Insolvency

44. Report to our Board Employer updates Encourage engagement and participation Next Steps

45. Background Legal Requirements Employer Responsibilities LPFA Checks Next Steps Summary

46. but by all employers working together, we can minimize these! THERE ARE ALWAYS RISKS

47. Automatic Enrolment Andrew Fleming The Pensions Regulator

48. Performance Administration Strategy Mike Allen Director of Pensions London Pensions Fund Authority

49. 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 The Background

50. 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 The Reasons Behind the Strategy