Agenda item

Members are required to have knowledge of the actuarial assumptions to be used in the next actuarial valuation of the Pension Fund as at 31 March 2016.

Declarations of interest:

None

Witnesses:

Barry McKay, Hymans Robertson

Key points raised during the discussion:

1. The Strategic Finance Manager (Pension Fund and Treasury) introduced the report, providing an overview of the actuarial assumptions to be used in the next actuarial valuation of the Pension Fund. He also introduced three different models of establishing discount rates (Gilts plus, CPI plus and the Economic model), and outlined the advantages and disadvantages of each one.
2. It was noted that the Economic model was not used widely amongst Pension Funds as it was considered to be more generous and less prudent than the other models.
3. The representative from Hymans Robertson provided an update to the Committee on the 2016 valuation process. He stated that Hymans Robertson had reviewed their valuation method in the previous year and decided, although no model was perfect, that Gilts plus model was the best available.
4. The representative also set out Hymans Robertson’s two step approach to valuation. Firstly, they set a funding target using the Gilts plus model and the assumptions set out in the report. Secondly, they set a contribution rate by running over 5000 assumptions.
5. The Chairman queried whether the contribution rate modelling was based on a Gilts yield or CPI model. The representative from Hymans Robertson responded that it was on a Gilts yield curve. A CPI curve  was not yet widely available and would therefore take more time to create. He added that the curve used did not impact on the discount rate, simply the way it was presented.
6. The Committee had a discussion, querying the benefits of the CPI plus model vs the Gilts plus model. A number of points where made including:
   1. Whether the Gilts plus model was proving to be too prudent and therefore not offering the best deal to employees, and ultimately Council Tax payers.
   2. Whether it was sensible to use a Gilts Plus Model when so much of the fund was invested in assets.
   3. That the distorted market tended to favour the CPI plus model.
   4. The impact of using the Gilt plus model on public perception, in that the CPI model tends to produce a smaller number.
   5. Whether the Gilt plus model represented an accurate view of what is happening with inflation.
   6. Whether the Gilt plus model was overestimating the funds liabilities.
7. A number of Members acknowledged the fact that stabilisation had been successful in setting a stable contribution rate – and that this was something that was important to employers.
8. The Vice-Chairman stated that any measure chosen could be subject to future distortions; it just happened that current distortions could be seen in the Gilt market.
9. The Chief Finance Officer stated that Officers did receive queries from the public when accounts were published regarding the size of the deficit and liabilities. Any change to how they were presented would need to be explained.
10. The majority of the Committee Members expressed preference for the CPI model. It was felt that if the fund liabilities were linked to CPI, valuation should be linked to CPI as well.
11. It was agreed to look at this item again at the May meeting with a view to making a final decision on which model to use in the future.

Actions/further information to be provided:

None.

Resolved:

1. That the Pension Fund Committee considers whether to move to the CPI plus model at their next meeting in May 2016.