Hampshire Pension Fund has benefited from keeping its faith in equities, seeing its funding level increase by 8 percentage points over three years as a result of strong investment returns and additional employer contributions.
Many local authority schemes have seen an improvement in funding levels due to strong investment returns and a rise in gilt yields, with some now considering methods of locking in these gains. Recently Surrey saw an increase of nearly 8 percentage points due to asset performance, and is now considering a derisking strategy.
Source: Hampshire 2013 valuation report
Hampshire's funding level increased to 80 per cent at March 31 2013, regaining some of the ground it lost in 2010 when its funding level dropped to 72 per cent, down from 77 per cent in 2007, according to the scheme's 2010 and 2013 valuation reports.
“The increased contributions and good performance have really been the two main reasons for the better funding position,” said Vannah Duffin, investment officer at the scheme.
The average investment returns between valuations was 9.4 per cent, compared with an average discount rate of 6.8 per cent assumed at the scheme’s 2010 valuation.
The £4.3bn fund has invested £1.3bn in UK equities and £1.1bn in overseas equities, according to its 2013 valuation report (see box).
Hampshire's scheme funding
At the time of the last valuation Hampshire's administering authority agreed employer contributions designed to bring the scheme’s funding level back up to 100 per cent over a period not exceeding 25 years.
These contributions started at £51.4m for 2011/2012, increasing to £107.5m in 2020/2021 and then by 5.3 per cent a year until April 2036, according to the 2013 valuation report.
Lower-than-expected pay increases also contributed to the improvements in the scheme’s funding level, according to the valuation report, rising by 1 per cent rather than 5.3 per cent assumed in 2010.
Salaries in general across local government pension schemes have only increased by around 1 per cent over the three-year valuation cycle, said McKay. “The impact that has is to effectively place a lower value on the active liabilities,” he said.
“Growth in any market would improve performance and if we were quite heavily weighted in equities then that’s going to help funding levels,” Duffin said.
Strong equity performance
Assets in general in local government schemes have gone up by around 25 per cent between 2010 and 2013, said Barry McKay, partner at consultancy Hymans Roberston.
A lot of that is down to strong equity performance as well as rising gilt yields, which have lowered the value of liabilities, he said.
McKay said he has seen more local authority funds looking at whether to derisk.
“I guess the appeal there is, why take more risk than you need to and if funding levels have come up a bit since last year due to good returns and changes in market conditions...they want to lock in these gains you have now,” he said.
Seizing the moment
However, many schemes were rerisking in the last quarter of 2013 as they sought to benefit from rising equity markets to improve their funding levels, according to data from Financial Times service MandateWire.
For many private sector schemes that do not have a new flow of members, now is a good time to derisk compared with a year ago, if their sponsor is able to afford it, said Mark Nicoll, partner at consultancy LCP.
Nicoll said he has seen some of his clients look to reduce their exposure to equities as a result.
“Part of the reason for that is it depends very much on how strong their finances are and how close they are to being fully funded,” said Nicoll.
However, LGPS funds, which have new members and liabilities coming through all the time, would probably look to maintain that high-risk profile, he said.
