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CIPFA Scotland Public Finance Conference 2014

CIPFA Scotland Public Finance Conference 2014. Local government pensions: a changing landscape. Richard Warden Catherine McFadyen 7 March 2014. Agenda. Pension reform Live long and prosper? Auto-enrolment . Pension reform . What’s going on in the LGPS?. New scheme design

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CIPFA Scotland Public Finance Conference 2014

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  1. CIPFA Scotland Public Finance Conference 2014 • Local government pensions: a changing landscape Richard Warden Catherine McFadyen 7 March 2014

  2. Agenda Pension reform Live long and prosper? Auto-enrolment

  3. Pension reform

  4. What’s going on in the LGPS? • New scheme design • Increased governance (including tPR oversight) • New cost control mechanism • Structural reform in England and Wales • Academies consultation in England • Fair Deal and associated guidance • And business as usual … triennial valuations! • 2014 will be a busy year

  5. Why reform public sector pensions? • Long term sustainability and affordability • Living longer • Final salary system unfair? • Mobility / portability of pensions • Public / private sector divide • Government short term objective – cashflow on unfunded (PAYG) schemes?

  6. The Scottish angle • Focus on sustainability with high take-up of members • Contribution rates which protect the lowest paid within the workforce • Provision of quality benefits to scheme members

  7. Income more after you retire? Good design? Chart based on CARE scheme with 1/60th accrual and allows for Basic State Pension of £140 per week. Assumes the member has a full public service career (45 years in this example) and remains in the scheme throughout. Sources: Hymans Robertson (2011) and Turner (2004)

  8. CARE winners and losers Example member: pay at start £20k, 20 years’ service, 1/60th pension rate CARE should be fairer Illustrative only and no allowance for historic schemes, commutation etc

  9. Older members gain…. Currently 58 retires at 65 earning£20,000 Expected pension at retirement under LGPS 2009 = £2,300Expected pension at retirement under LGPS 2015 = £2,600 Increase of 13% ! These figures are based on HMT/GAD assumptions of 4.25% per annum salary escalation and 2% per annum CPI increases.

  10. …at the expense of younger members Currently 25 retires at 68earning£20,000 Expected pension at retirement under LGPS 2009 = £15,900Expected pension at retirement under LGPS 2015 = £11,300 Decrease of 29% ! These figures are based on HMT/GAD assumptions of 4.25% per annum salary escalation and 2% per annum CPI increases.

  11. Impact of LGPS 2015 on employer costs • Cessation of contracting-out in 2016 will increase NICs

  12. Live long and prosper?

  13. Signs of ageing

  14. Regional variations High life expectancy Mid life expectancy Low life expectancy PH1 2AF PH1 2AE Source: Club Vita research based on VitaBank as at January 2013

  15. Differences in longevity • Unhealthy lifestyle postcode • Ill health retirement • Low affluence • Manual worker • Healthy lifestyle postcode • Normal health retirement • High affluence • Non-manual worker Life expectancy from 65: 11.5 years Life expectancy from 65: 22.4 years Lifestyle 5 years Health 2 years Affluence 3 ½ years Occupation <1 year • No such thing as a typical member • No such thing as an average scheme or employer Source: Club Vita‘s analysis based on membership as at 31 January 2012. Life expectancies shown from age 65, and are based upon Club Vita’s baseline longevity calibrated to the period 2008-2010.

  16. What might we see next? Source: Club Vita’s analysis of data from Human Mortality Database. (www.mortality.org)

  17. Life expectancy increasing faster than SPA LGPS costs could continue to increase Population life expectancy vs State Pension Age

  18. How can LGPS funds manage longevity? • Safety valves: • Cost control mechanism • Link to State Pension Age • Use tailored scheme specific assumptions • Base improvements on best available data and trends

  19. Auto-enrolment

  20. What is auto-enrolment? • Employer Duties • Starting from the 1st October 2012 all eligible employees must be auto enrolled by their employer into a qualifying workplace pension scheme. Employer Defined Contribution Scheme National Employment Savings Trust Employer Defined Benefit Scheme

  21. Impact on the LGPS • Many employers have deferred the staging date • Relatively small impact as take-up already good • Boosts cash flows in short term and increases employer costs • New 50/50 option may reduce opt-outs • More opt-outs from medium to high earners due to tax relief restrictions?

  22. And finally, what might the future hold? • Defined Ambition instead of CARE? • Further reform if economy remains sluggish (despite the 25 year promise) • Quicker information at fund’s fingertips • Greater focus on cash flow management • Increased management of employer risks e.g. covenants, individual investment strategies • Moe collaborative working between funds

  23. Thank you

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