Hertfordshire County Council Pension Fund

1. Hertfordshire County Council Pension Fund The search for stable contributions Bryan Chalmers, FFA Barry McKay, FFA 23 March 2010

2. What we’ll cover today 1. Basics 2. Funding update 3. Stability 4. Individual employers 2 2

3. Event Responsibility Timescale Provision of data Fund End of July 2010 Membership data queries submitted Hymans Mid August 2010 Membership data queries returned Fund End of August 2010 August 2010 Clean data sign - off Hymans 31 Valuation calculations Hymans End of October 2010 Provision and discussion of initial results Fund November 2010 Finalisation of employer results and setting of Hymans / Fund End of December 2010 contribution rates Final valuation report and r ates & a djustments Hymans By 31 March 2011 certificate issued What is the plan for the 2010 Valuation? 1. Basics 2. Funding update 3. Stability 4. Individual employers There is a lot of work for the administration team

4. Data submission for 2010 1. Basics 2. Funding update • Rely on accuracy of membership data • Administering Authority require information from employers • Changes in membership • Correct salaries/contributions paid • Missing/incorrect data could result in: • A higher value being placed on liabilities • A higher contribution rate 3. Stability 4. Individual employers

5. Promise now, pay later 1. Basics Lump Sum 2. Funding update 3. Stability Contributions Expenditure 4. Individual employers Member’s Pension Dependant’s Pension Income 40 65 85 Death Retirement Recruitment

6. Future cashflows 1. Basics 2. Funding update 3. Stability 4. Individual employers

7. Why do we do a valuation? 1. Basics • We have to • Recommend employer contribution rates • Assess how well pension promises are covered? • Monitor experience vs. assumptions 2. Funding update 3. Stability 4. Individual employers

8. Financial Assumptions Investment return/ Discount rate Inflation Pay increases Pension increases Consider: Economic outlook Actual Scheme assets Historical real pay growth Assumptions Amounts paid: Probability of payment : 1. Basics • Demographic Assumptions • Life expectancy • Member Options • Withdrawals • Marriage statistics • Consider: • Population trends • Members’ social status • Past Scheme experience 2. Funding update 3. Stability 4. Individual employers

9. We are living longer – but local variation 1. Basics High life expectancy 2. Funding update Mid life expectancy Low life expectancy 3. Stability 4. Individual employers

10. Current funding level 1. Basics 2. Funding update 3. Stability 4. Individual employers

11. Funding plan at 31 March 2007 1. Basics 2. Funding update 3. Stability Future excess returns 4. Individual employers (1) £3.6bn £672m Self-sufficient Deficit conts (2) £388m “ £3,212m £4.8bn Assets £2,152m • i.e. returns in excess of return on gilts Present value of deficit recovery payments over 20 years

12. Since the valuation 1. Basics 2. Funding update 3. Stability 4. Individual employers Future excess returns Future excess returns £830m How can we fill this gap? Self-sufficient Deficit conts £388m £4,116m Assets £2,226m 11 March 2010

13. How do we cope? - traditional valuation approach 1. Basics 2. Funding update 3. Stability 4. Individual employers Funding Level 100% 2010 2027 2030 2007 Year

14. Allowing for future returns 1. Basics 2. Funding update 3. Stability 4. Individual employers

15. A range of potential long term outcomes 1. Basics 2. Funding update 3. Stability 4. Individual employers Best outcomes 99% 300 95% 250 84% 200 Projected Funding Level 150 median 100 16% 50 0 5% Time 1% Worst outcomes • 5,000 simulations of the future • Rank from worst to best outcome to give distribution of possible outcomes

16. Can we rely on investment returns if we have long term secure covenant? 1. Basics 2. Funding update 3. Stability 4. Individual employers Median 16% 5% 1% ... but must understand the risks Source: Hymans Robertson, comPASS, Hertfordshire County Council Pension Fund

17. For long term secure employers only... 1. Basics 2. Funding update 3. Stability 4. Individual employers • Limit increases and future decreases (+1 and -1% p.a.) without harming expected long term funding level • Underpay in bad times, overpay in more favourable conditions More affordable contributions, greater budgeting certainty

18. Benefits of risk based valuation 1. Basics 2. Funding update 3. Stability 4. Individual employers • Understand Fund dynamic • Early warning system • Better Governance/More Transparency • Employer specific analysis • Support for change

19. Less secure & shorter-term employers 1. Basics 2. Funding update 3. Stability 4. Individual employers Challenge: protect the fund avoid pushing employers into insolvency • Reconsider deficit recovery • Seek additional security • Understand the risks • Assess the likelihood of meeting target funding

20. What is target funding level by next valuation? 1. Basics 2. Funding update 3. Stability 4. Individual employers 100% X X 80% 65% Funding Level 2010 2013 2017 End of contract term What is probability will be on track in 3 years?

21. Well-funded stable employer 1. Basics 2. Funding update 3. Stability 4. Individual employers Funding level = 88% Current rate = 16% Theoretical rate = 22% Restricted rate = 19%

22. Poorly funded employer 1. Basics 2. Funding update 3. Stability 4. Individual employers Funding level = 60% Current rate = 20% Theoretical rate = 30% Restricted rate = 24%

23. Conclusions and next steps 1. Basics 2. Funding update 3. Stability 4. Individual employers • For long term secure employers • Increases in contributions required • But can stabilise increases • Without any long term damage to the Fund • Underpay in bad times, overpay in more favourable conditions • For other employers • Increases in contributions inevitable • Dialogue with AA is essential • Risk assessment to test likelihood of meeting target funding • Based on evidence of security

24. Thank You Any questions?