Welcome and Introduction Anthony Mayer Chairman London Pensions

Welcome and Introduction Anthony Mayer Chairman London Pensions Fund Authority Employer Forum 2 nd December 2011

The LGPS Scheme Developments Mike Taylor Chief Executive London Pensions Fund Authority Employer Forum 2 nd December 2011 2

Public Sector Pensions The Main Challenges • Public and political perception • Affordability and sustainability • Life expectancy or longevity • Inter-generational equity Employer Forum 2 nd December 2011

Public Sector Pensions • Funded schemes • Unfunded schemes (Pay as You Go) • 1. 7 million actives • 3. 3 million actives – Local Government – MPs Employer Forum – – – Teachers National Health Service Civil Servants Police Fire-fighters Armed Forces 2 nd December 2011 4

Clamour for Change – why? • Slow death of private sector defined benefit pensions • Unfairness – taxpayers paying for public sector pensions without equivalent pension rights themselves • Rising cost, particularly longevity Employer Forum 2 nd December 2011

Government’s priorities • Reduce the total liability of public sector pensions – Estimated in excess of £ 1 trillion • Address the annual structural budget deficit • Address rising costs Employer Forum 2 nd December 2011

Government action to date • 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. 8 bn per annum by 2014/15 Employer Forum 2 nd December 2011

Government action to date (contd) • 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 Employer Forum 2 nd December 2011

Affordability & sustainability • All pension funds are sustainable if … – Increase contributions – Reduce benefits – Increase retirement age Employer Forum 2 nd December 2011 – pay more – get less – work longer

New public sector pension schemes • 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” Employer Forum 2 nd December 2011 10

Lord Hutton’s conclusions • Retain defined benefit • Switch from final salary to career average • Protect accrued rights • Increase retirement age • Review employee / employer balance Employer Forum 2 nd December 2011

Lord Hutton’s conclusions (contd) • Shared risk and automatic regulation • Independent scrutiny • Improved governance • Abolition of fair deal • New legislative framework • Implement by 2015/16 Employer Forum 2 nd December 2011

Lord Hutton’s conclusions for LGPS • Retain LGPS funded status Employer Forum 2 nd December 2011

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 1/60 th or lower – perhaps 1/70 th • Other public sector schemes – Similar Employer Forum 2 nd December 2011

Changed Indexation • RPI to CPI – Already accounted for in valuations – Subject to Judicial Review (Autumn 2011) Employer Forum 2 nd December 2011

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 Employer Forum 2 nd December 2011

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 Employer Forum 2 nd December 2011

Objectives • Long term sustainability • Maintain the fund for future entrants – Prevent mass opt outs Employer Forum 2 nd December 2011

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 Employer Forum 2 nd December 2011

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 Employer Forum 2 nd December 2011

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 Employer Forum 2 nd December 2011

Investment Review Vanessa James Director of Investment London Pensions Fund Authority Employer Forum 2 nd December 2011

VOLATILE! Employer Forum 2 nd December 2011

The Last Twelve Months • 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! Employer Forum 2 nd December 2011

European Crisis • 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. Employer Forum 2 nd December 2011

• 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 Employer Forum 2 nd December 2011

European Crisis What needs to be done short term: 1. The ECB(? ) must guarantee all deposits in European banks 2. The ESF must gear up to 4 x the sizes being spoken of at the moment 3. There needs to be a severe restructuring of debt 4. As well as worrying about deficit reduction, lack of economic growth needs to be dealt with as a priority……. Germany a problem here Employer Forum 2 nd December 2011

European Crisis 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 Employer Forum 2 nd December 2011

Is there any good news? • 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 Employer Forum 2 nd December 2011

What the Fund Holds Distribution at 30 th September 2011: Asset Class % of Fund Global and private equity 44 PDF LDI and active bonds 37 Diversified Assets 17 Cash 2 Total 100 Employer Forum 2 nd December 2011 30

So is the Strategy Fit for Purpose? 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 Employer Forum 2 nd December 2011

Something for you now The LPFA fund totalled £ 3861 m on Sept 30 th 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% Employer Forum 2 nd December 2011

Coffee Break and Networking Employer Forum 2 nd December 2011

Employer Covenant Checks Tony Williams Employer Services Team Manager London Pensions Fund Authority Employer Forum 2 nd December 2011

Agenda • • • Background Legal Requirements Employer Responsibilities LPFA Checks Next Steps Employer Forum 2 nd December 2011

Reasons • Prevent liabilities falling to other employers • Improve risk management Employer Forum 2 nd December 2011

Causes • Becoming insolvent • Changes to Government funding – Grant reductions/grant removal Employer Forum 2 nd December 2011

Legal Requirements 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. Employer Forum 2 nd December 2011

Legal Requirements Employers • To disclose material events to LPFA under: – The Occupational Pensions Scheme (Scheme Administration) Regulations 1996 Employer Forum 2 nd December 2011

Reportable Events • 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 Employer Forum 2 nd December 2011

LPFA Checks/Controls • Credit rating report. • Monitoring companies house. • Web tracking – Google Alerts. • Annual Declaration form. • Engaging with employers. Employer Forum 2 nd December 2011

More Detailed Checks • Cessation valuation payment plan • Valuation recovery spread period • OR when LPFA believe appropriate CHECKS • Full review of accounts • Additional security Employer Forum 2 nd December 2011

Insolvency What happens? • Maximise monies through liquidation process • Appoint new liquidators to protect fund • Seek specialist legal advice Employer Forum 2 nd December 2011

Next Steps • Report to our Board • Employer updates • Encourage engagement and participation Employer Forum 2 nd December 2011

Summary • Background • Legal Requirements • Employer Responsibilities • LPFA Checks • Next Steps Employer Forum 2 nd December 2011

THERE ALWAYS RISKS but by all employers working together, we can minimize these! Employer Forum 2 nd December 2011

Automatic Enrolment Andrew Fleming The Pensions Regulator Employer Forum 2 nd December 2011

Performance Administration Strategy Mike Allen Director of Pensions London Pensions Fund Authority Employer Forum 2 nd December 2011

The Background • 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 Employer Forum 2 nd December 2011

The Reasons Behind the Strategy • 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 Employer Forum 2 nd December 2011

Has the Strategy been Successful? • Constructive feedback taken on board by LPFA – improved engagement • Ability for employers to view on-line forms submitted and progress made • Improved processing and elapsed times • End of year error rates reduced significantly • Contributions paid on time Employer Forum 2 nd December 2011

Facts and Figures • On line forms submitted: July to September 2009 – 95 forms July to September 2011 – 2, 400(98%+) • End of year error rates: Year ending 31/3/10 – 20% Year ending 31/3/11 – 12% • Contributions paid accurately and on time: April 2011 October 2011 Employer Forum – - 31 (late/inaccurate/no form) 9 (late/inaccurate/no form) 2 nd December 2011

Facts and Figures continued • Average elapsed time from date of receipt to date of completion: New joiners Early leavers Employer estimates 09/10 23 46 8 10/11 10 28 6 11/12 5 23 6 • Target time from date of receipt of all relevant information to date of completion: New joiners Early leavers Employer estimates Employer Forum 09/10 10 10 5 2 nd December 2011 10/11 2 8 3

What’s Next? • Encourage use of data match facility • Reports on performance available on-line at www. yourfund. org. uk • Employer feedback • Continued close working through challenging times Employer Forum 2 nd December 2011

Finally Thank You for all your efforts!!! Employer Forum 2 nd December 2011

Questions Employer Forum 2 nd December 2011