Contact: Anthony Dodridge, (01962) 847407; email: [email protected]

1 Summary

1.1 An actuarial valuation of each local government pension fund is carried out every three years by the funds' appointed actuaries.

1.2 This report summarises the outcome from the valuation of the Pension Fund at 31 March 2007 for Hampshire and for other counties' funds.

1 Recommendation

That the report be noted.

2 Hampshire's valuation

2.1 The Hampshire Pension Fund actuaries, Hewitt Bacon & Woodrow, have carried out an actuarial valuation of the Hampshire County Council Pension Fund at 31 March 2007. The main aim of the triennial actuarial valuation is to review the financial position of the Fund and recommend the rates at which the employers should contribute to the Fund for the following three years.

2.2 The actuary does this in two parts. First, the costs of funding the benefits accruing to members of the Fund from service to date, i.e., past service, are determined. This enables an assessment over whether the Fund is in deficit or surplus. Secondly, the cost of members' future service is assessed. The two calculations are then combined to set the overall employers' contribution rates, which are shown below.

Employers' contribution rates

(percentage of pensionable pay)

2008/09 18.1%

2009/10 18.6%

2010/11 19.1%

2.3 These employers' contribution rates take into account the changes set out in the New Look Local Government Pension Scheme (LGPS) for employees in England and Wales from 1 April 2008.

Funding level and past-service deficit

2.4 The actuary calculates the value of the Fund's liabilities to pay benefits for past service based on information about existing active contributors, deferred contributors (those that have left the service but not yet retired) and pensioners. The assumptions used include future pay awards, pension increases and mortality rates to calculate future cashflows out of the Fund for these benefits. Any changes to the Local Government Pension Scheme that may affect the cost of benefits would also be taken into account.

2.5 The actuary then discounts the liabilities to present day values, as at the date of the valuation (e.g., 31 March 2007), using discount rates based on gilt yields plus a small premium to reflect the Panel's decision to invest in assets that are expected to provide higher returns than gilts. This discounted figure for the Fund's liabilities is known as the funding target. At 31 March 2007, it was £3,808.8m for the Hampshire Fund, compared with £2,901.1m at 31 March 2004.

2.6 The actuary uses the actual market value of the Fund's assets at the valuation date. At 31 March 2007, the Fund's assets had an audited market value of £2,917.8m. This compared with £1,990.1m at 31 March 2004, which included a £65.0m smoothing adjustment which had increased the value placed on the assets, to dampen down the variability of future contribution requirements. This smoothing adjustment has now been removed by the actuary.

2.7 The funding deficit is calculated by comparing the discounted present value of the liabilities for past service (the funding target) with the Fund's asset value. At 31 March 2007, the funding deficit was £891m (£3,808.8m minus £2,917.8m). The assets as a percentage of the funding target is known as the funding target ratio. This was 76.6% (£2,917.8m divided by £3,808.8m) at 31 March 2007.

2.8 The funding level shows the ratio of the Fund's assets to its accrued liabilities. As the funds vary so much in size, the funding level gives a better indication of fund's financial position than the size of deficit. At 31 March 2007, the funding level had increased to 76.6%, which represents a significant improvement from 68.6% at 31 March 2004.

2.9 The past-service funding deficit of £891m at 31 March 2007 has also improved by £20m since the previous valuation.

2.10 Main factors which have improved the position are:

· investment returns between March 2004 and March 2007 being higher than assumed in the 2004 actuarial valuation - this reduced the deficit by £473m

· additional employers' contributions paid - this reduced the deficit by £40m.

2.11 Main factors which have worsened the position are:

· the assumed levels of pension and pay increases are 0.3% p.a. higher than assumed at the 2004 valuation - this increased the deficit by £188m

· the interest on the deficit - this increased the deficit by £180m

· the change to the mortality assumption - increasing the deficit by £93m.

2.12 The Fund's liabilities, as calculated by the actuary, will not have to be met for many years and so it is not essential that the funding deficit is recovered immediately. A recovery period of 25 years for scheduled bodies and 40 years for admitted bodies has been agreed with the actuary from 1 April 2008, which is unchanged from the actuarial valuation at 31 March 2004.

2.13 Scheduled bodies are those organisations that have a right to be in the Fund. These include the County Council, the two city councils, the 11 districts, Hampshire Police Authority and other employers which were formerly part of the member local authorities, for example, the higher and further education colleges. Admitted bodies are those employers that have been allowed into the Fund at the County Council's discretion, for example, independent schools.

Future service and phased increases in employers' contribution rates

2.14 The table below compares the overall employers' contributions resulting from the actuarial valuations in 2004 and 2007.

2.15 The actuary is also required to calculate the employers' contribution rate that is necessary to fund the benefits expected to accrue to members in the future. This is distinct from the benefits resulting from past service dealt with in the previous section.

2.16 Hewitt Bacon & Woodrow have set the future service rate at 14.5% of pensionable pay this time after deducting employees' contributions, compared with 12.9% in 2004.

2.17 This increase can be explained by higher costs arising from the introduction the 2008 Scheme and extended protection benefit provision, improving longevity and higher long-term inflation assumptions implied by falls in index linked gilt yields in absolute terms and relative to fixed interest gilt yields. This increase has only been partially offset by higher employees' contributions.

2.18 The past-service deficit funding has reduced from 6.9% to 5.4% of pensionable pay mainly as a result of the actual returns on the Fund assets over the last three years having been higher than those assumed in the previous valuation. This reduction has been moderated by more cautious financial assumptions for the future, together with an assumed increase in pensioner longevity.

2.19 The short-term additional asset return had been based on assumed higher returns on property and equities of 3% per annum above gilts for the balance of the recovery period in the previous valuation. This assumed higher return on property and equities has since been significantly moderated in the latest valuation.

2.20 To ease the burden of this increase on employers' budgets, the actuary again agreed to phase the required increase in employers' contribution rates as shown in the table below.

3 Other counties' funds

3.1 The Society of County Treasurers has coordinated a survey of the valuation results for the 34 English shire counties together with the Isle of Wight. There are over 60 other local government pension funds in the United Kingdom. The key points are:

· Hampshire's employers' rate as determined by the 2007 actuarial valuation of 19.1% is slightly above the average of 18.7% for the 26 counties for which information is available

· Hampshire's funding level of 76.6% is below the average of 82.8% for the 32 counties for which information is available

· Hampshire's deficit of £891m is the second largest amongst the 32 county funds for which information is available. Kent has the largest deficit at £978m. This is primarily a reflection of the size of the Hampshire Fund. Only Lancashire and Essex have larger funds amongst the 32 counties for which information is available. As the funds vary so much in size, the funding level is a better indicator of fund performance than the size of deficit

· Hampshire's 25 year period over which the past-service deficit will be recovered is longer than the average 21 year deficit recovery period amongst the 31 counties for which information is available. There is a clear relationship between the duration of the recovery period and the approach being taken by the various appointed actuaries of each of the counties. Whilst Hewitt Bacon & Woodrow applies a 25-year recovery period, William Mercer generally seems to use 22 years, whilst Hymans Robertson uses a shorter 20-year term.

Section 100D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.

NB: The list excludes:

None.

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