Agenda item

That the Committee approve of the Funding Strategy Statement and delegate the refinement of the document to Fund Officers in readiness for the consultation with the participating employers.

The Fund Actuary, Paul Middleman presented the key elements of the 2016 draft Funding Strategy Statement (FSS).  The Committee were asked to approve the draft FSS and delegate the refinement of the document to Fund Officers before it goes to consultation with employers.

In terms of the overall Fund governance it is a requirement to prepare, publish and review the FSS. It was noted as part of the presentation that Mr Middleman does not feel that the pooling of investments in Wales will have a major impact on the 2016 FSS. The Fund is duty bound to consult with participating employers before finalising the document but ultimately it is an Administering Authority decision on the how the funding strategy is implemented. The CIPFA guidance on preparing an FSS is currently being reviewed in light of the change in regulations/oversight and will be published in the coming weeks.  It was noted that the draft FSS incorporated the expected changes in the guidance but may need refinement depending on the final outcome.

Paul Middleman stated the key areas to be addressed in the FSS:

·         Aims and purpose

·         Treatment of Employers (funding and contributions)

·         Solvency target

·         Risk control and management (including Flightpath)

·         Other policies (new and leaving employers)

Paul Middleman discussed the key points of the FSS and main funding objectives which will confirm the employer’s contribution requirements for 2017/2020.  These were detailed in the separate report and draft FSS and supporting presentation.  An additional consideration of this valuation is the scrutiny under Section 13 of the Public Service Pensions Act 2013, which is performed by the GAD on behalf of the Government.  It was noted that whilst this should be a consideration it should not drive funding decisions. Section 13 valuations are simply a mechanism to ensure that all LGPS Funds are setting sufficiently robust funding plans in absolute terms and relative to others.  

The key parameters which are proposed to be changed versus the existing FSS from the 2013 valuation were as follows:

·         Linking the discount rate to the investment returns above CPI - this is the key driver of liabilities

·         Remove allowance for 50/50 benefit take-up other than where a member has already opted for it (for the 2013 valuation, 5% of the membership were assumed to opt for this but the experience does not support it)

·         Life expectancy update – initial analysis for CPF suggests there has been a tailing off of life expectancy improvements versus expected which would reduce liabilities

·         Reducing recovery period deficit where possible with the total Fund average possibly reducing by 3 years – this will also be a key measure under GAD’s Section 13 assessments under the Long Term Cost Efficiency requirements,

·         Update/development of related policies – examples were the termination and admission policies.  A critical addition at this valuation was the implementation of an employer covenant review framework.

Steve Hibbert queried why the 50/50 option take-up was so low and whether it had been communicated fully.  It was confirmed that this is a similar pattern across the LGPS which could be due to a number of factors including communication, inertia and that auto-enrolment is not yet fully up and running.  This will continue to be monitored over time.

Paul Middleman went through some preliminary whole Fund results (which were based on an approximate update from the 2013 valuation).  It was noted that based on this, stability of deficit contributions (in real terms) may be achievable but it was looking likely that there would be pressure on the future service (primary) rate.

Karen McWilliam asked for clarification in the difference in the discount rate between valuations. Mr Middleman confirmed these are broadly the same based on the analysis of expected investment returns (versus CPI) at each valuation.  However, the return expectations will need to be reconsidered post BREXIT, to check the funding plan remains robust.  This additional analysis will be carried out during the valuation project.

The Corporate Finance Manager enquired about the flexibility of deficit recovery plans given affordability constraints.  Paul Middleman accepted that the draft parameters (in particular the proposed reduction in the period to target the same end point as the 2013 valuation recovery plan) could impact on the affordability of contributions.   Affordability will also be affected by the removal of the allowance for 50/50 take-up (on average, this will increase primary rates by 0.3%) but it was noted at the last valuation that if the 5% take-up levels were not met it would have to be reduced/removed. 

Paul Middleman noted that all the figures are approximate and need to be updated for the final outcome of demographic factors, actual membership data.  In particular there are some positive liability experience items not currently allowed for e.g. the 2016 CPI pension increase award was zero for pensioners.   This will help with affordability.  It is also a starting point for consultation and ultimately the final position will take into account all aspects (including affordability for employers).  The critical issue is to ensure the overall funding plan is robust but does not put an unnecessary burden on employers.

Paul Middleman expanded on the development of a covenant monitoring framework to assist in considering the financial strength of employers and the assessment of the reasonable affordability of contributions. The monitoring framework will help to identify employers posing the highest risk of unrecovered debts but also allow Fund Officers to monitor any changes over time.   The key objective is to take a proportionate approach to setting up the framework so that it is as effective as possible but not unduly complicated.  If an employer is identified as higher risk then further investigation and action can be taken on a bespoke basis.

It was also noted that the flightpath structure will be reviewed as part of the valuation taking into account market outlook.  This could affect the underlying yield triggers in the Insight mandate and possibly the funding level triggers.   The principle aims will remain the same which are to help achieve stability in employer contributions by providing more certain real returns versus CPI (which will affect liability and deficit values) but in the most cost effective way.

The timeline and next steps were discussed including the employer’s consultation and the final outcome/FSS being signed off by Committee in February 2017.

Councillor Haydn Bateman queried how we could minimise the impact of an employer defaulting on its obligations.  Mr. Middleman explained that full understanding of the risks is critical (through the monitoring framework) and to try to improve security such as obtain a guarantor or charge on assets.   As an initial stage obtaining as much information as possible and where an employer has affordability issues, using that information to manage the risks appropriately.  In some cases there may be little action that can be taken, but good information is vital to decision making and further due diligence should be done to demonstrate that all options have been explored.  It was noted that relative to other Funds, the CPF is likely to have less employers potentially falling into a higher risk category but circumstances can change quickly.

RESOLVED: 

That the Committee approve of the Funding Strategy Statement and delegate the refinement of the document to Fund Officers in readiness for the consultation with the participating employers.