LPFA Fund Member Forum 2013 Overview: LGPS 2014 and Governance Structure Analysis

1. London Pensions Fund AuthorityFund Member Forum 2013

2. Sir Merrick Cockell LPFA Deputy Chairman Welcome & Introduction

3. Presentation Agenda • LGPS 2014 • A new Local Government Pension Scheme • LPFA involvement in shaping the regulations • LPFA Review of the Year • Improving our service to you • Investment highlights • Controlling costs • Expanding the business • Governance • What’s on the horizon • The LPFA Board • Board structure • Board responsibilities • Call for Evidence and vision for the LPFA • Too big? Too small? Just right? • Vision for the LPFA • Question & Answer Session

4. LGPS 2014 An overview of the LGPS 2014

5. LGPS 2014 - Overview Moving from Final Salary to C.A.R.E scheme 1/49th accrual CPI revaluation Pension age linked to State Pension Age (min 65) Voluntary retirement from 55 Protection for pre 2014 service and underpin for those within 10 years of age NPA at April 2012

6. LGPS 2014 - Overview Part time worker contribution rates assessed on actual pensionable pay (not full time equivalent) – so many will pay less 50/50 option Can purchase additional pension via APC or AVC Existing pensioner and deferred members – no change

7. Governance Responsible Authority is CLG Scheme Advisory Board Scheme Manager and Pension Board

8. LPFA and LGA working in partnership LPFA have responded to all consultation documents for LGPS 2014 LPFA is a member of the ‘LGPS 2014 Administration Group’ hosted by the LGA LPFA was involved in the discussions about the LGPS governance structure under the Public Service Pension act. The LPFA is working with the LGA to develop LGPS2014 Scheme modellers for members The LPFA is working with the LGA to develop a series of educational videos promoting the new pension

9. Susan Martin

10. Dermot ‘Skip’ McMullan LPFA Board Member The LPFA Board

11. LPFA Board

12. LPFA Corporate Management Team (CMT)

13. LPFA Committees

14. Board Responsibilities • The governance of the LPFA is through the operation of its Board and Committees • The Board is responsible for: • the governance of the London Pensions Fund Authority in accordance with statutory regulations; • the submission of a Strategy Statement and a Budget Statement to the Mayor each year; • the issue of a levy each year under the regulations; and • directing and monitoring the Executive; this incorporates the investment strategy, the pensions administration function and all support services. • The Board has a fiduciary duty to: • participating employers and the members of the Fund to ensure contributions are collected, that benefits are calculated correctly and paid promptly, and that any surplus monies are properly and prudently invested; and • the council tax payers of Greater London in respect of expenditure falling to be met from the levy. • and is accountable to: • the Mayor and the GLA for the proper management of the Authority's affairs; • the employing authorities in the Fund for the proper administration of the Scheme; and • Agency clients for the operation of their administration contracts.

15. Edmund Truell LPFA Chairman Call for Evidence and vision for the LPFA

16. Too Big? Too Small? Just Right?

17. Bankrupt In Clink?

18. Bank of England Pension Fund Total contribution level in 2011 56.5% of pensionable salaries Closed fund

19. LGPS Assets and Liabilities Assets Liabilities Risk free basis (2010) £150bn £300bn Actuarial basis (2010) £150bn £200bn Failing funds Low solvency – 11 funds<70%, lowest 60% = only 35% on swaps based liabilities Higher employer contribution rates – 12 funds >23%, highest 29.9%

20. Pooling LGPS ALM – key advantages • Scale gives access to better liability management  • Economies of scale in fund investment • Scale gives access to long term investment opportunities • Economies of scale in fund administration

21. Pooling LGPS Fund Administration London PwC estimate savings £10 million per annum Audit Commission - savings of £34m per annum if at level of average metropolitan fund PwC LGPS Core administration costs Total costs per scheme member per scheme member County Fund £24 £93 Metropolitan Fund £22 £55 London Fund £53 £179 LPFA £70 £393 ATP Denmark- €11 per member per annum (2011) PGGM Holland- €75 cost per participant (2012)

22. Pooling LGPS – Reducing fees • Financial Times research • Some councils paying 3 x more fund manger fees than those of similar size • A quarter of funds with the most expensive investment management paid for more than four times as much as the quarter of funds with the cheapest. For an average sized fund, this represents a difference of £5.5m per year • Call for greater transparency. Comparisons are difficult because fees vary according to different investment strategies. There is no standard or commonly used definition of what should be incorporated in this number. • To make it even more difficult to compare performance, each LGPS fund is likely to have a different benchmark, given the different liabilities and age profiles of membership within the funds.

23. Pooling LGPS Asset Management London savings PwC £120 - 200 million p.a Global research (Rotman Institute, Toronto) Largest plans outperform smaller ones by 43-50 basis points per year Up to £0.75bn per annum for LGPS, or £15bn off liabilities Greater returns in alternative hard to source investments Internal management costs 3 times less than external management Private equity and real estate 10.3% p.a improvement in returns direct v funds (Towers Watson) 11% p.a improvement (Wellcome Trust)

24. Pooling LGPS – Better liability management • Hedging inflation risk, interest rate risk, longevity risk • Only available to larger pools of pensions • Centre of expertise • LGPS funds maturing • Between 2010 and 2012 • 7% decrease in active membership • 25% increase in pensioner and deferred members

25. Pooling LGPS – Seeking Real Returns Crucial to get Real + 4% to get to fully funded Direct or co-investment opportunities, not funds Wellcome Trust – illiquid assets outperformed public assets by 25% over last 5 years Infrastructure Housing for rent or sale

26. Pooling LGPS – Bringing it all together Improve expertise LGPS relies on external advisers – pay multiple times for same advice Very few professional Chief Investment Officer roles Few experienced in-house investment teams Improve governance Better governed plans having higher scale economies Are elected councillors best placed to run pensions schemes, asset and liabilities matching and managing different asset classes such as Infrastructure? Why does every fund manager, IFA, insurer, in the UK have to be professionally qualified BUT vast sums of public money can be run by untrained people with no experience and no skills, jeopardising the financial security of thousands of not very well off pensioners?

27. Global Trends Consolidation into bigger funds Europe Netherlands Denmark North America Canada US Australia

28. LGPS Super Pools Could be regional – easier legislation – but don’t buy the ‘localism’ argument

29. A Plan for the Minister Bring the funds together from 2014 into a new body – Public Pension Funds Authority (PPFA) + five super pools Super pools held to account by councils’ pension committees Force failing funds (eg: less than 40% swaps basis funded) into PPFA following 2013 valuation, i.e. from April 2014 Deficits remain a local liability, and local employers can set the terms. Ideally close to new entrants and stop future benefits accrual Force failing sponsors to put in specie assets into the fund, e.g. vacant land, property, and have a recovery plan

30. Questions?