The Government Actuary’s Department has published its statutory review of the Local Government Pension Scheme, listing a number of recommendations for the imminent 2022 valuations.
Though commentators have branded these recommendations largely “achievable”, the GAD raised two “amber flags” to highlight potential issues that will need to be addressed.
The recommendations
Its report, prepared for the Department for Levelling Up, Housing and Communities, made four recommendations for the LGPS, and reported on the progress made towards achieving the five recommendations published in the 2016 report.
There was insufficient information regarding McCloud at the time of the 2019 valuations to ensure a consistent approach. We are engaging with GAD in advance of the 2022 valuations to understand their views on McCloud; however, in the absence of new regulations and the Universal Data Extract [we were] not able to output the data we need
Melanie Durrant, Barnett Waddingham
With respect to the 2022 valuations, it recommended that the LGPS Scheme Advisory Board considers the impact that inconsistency — in methodologies and assumptions used — might have on the LGPS.
Specifically, the GAD called on the SAB to consider whether a consistent approach should be developed for schools transitioning into academies, as well as for assessing the impact of emerging issues like McCloud.
Melanie Durrant, principal at Barnett Waddingham, called the point regarding academies “the most controversial recommendation”, as it “doesn’t fall under the remit of section 13”.
She continued: “However, we appreciate the desire to find some consistency in the treatment of academies in the LGPS and we are working with GAD to explore the various options to try and achieve this.
“Similarly, there was insufficient information regarding McCloud at the time of the 2019 valuations to ensure a consistent approach. We are engaging with GAD in advance of the 2022 valuations to understand their views on McCloud; however, in the absence of new regulations and the Universal Data Extract [we were] not able to output the data we need.”
The second recommendation was for the SAB to consider how all funds ensure that the deficit recovery plan “can be demonstrated to be a continuation of the previous plan, after allowing for actual fund experience”.
“Information regarding recovery plans has been a long-standing conversation with GAD as we disagree with GAD’s interpretation of the [Chartered Institute of Public Finance and Accountancy] guidance in relation to deficit-recovery periods,” Durrant said.
“GAD’s view is that they would not expect to see funds reducing contributions and extending recovery periods. Our continued interpretation of the guidance is that the focus shouldn’t be on a fixed end point, rather a period over which it is appropriate to fund any appearing deficit.
“If a recovery period is too short, then there could be unnecessary burden placed on taxpayers and it is more important to focus on the stability of contributions for affordability and cash flow reasons.”
The third recommendation was that fund actuaries provide additional information about total contributions, discount rates and reconciling recovery plans in the LGPS dashboard, which was introduced in 2019.
The final recommendation was that the SAB should review asset transfer arrangements from local authorities “to ensure that appropriate governance is in place around any such transfers to achieve long-term cost efficiency”.
Durrant disputed “some of the terminology and references made by GAD regarding asset transfers”, but appreciated “the overriding desire to ensure that appropriate governance and paperwork is in place when additional contributions are made”.
“This is an action that is becoming more prevalent in LGPS funds, and therefore having a clear reporting process in place is welcomed,” she said.
Issues flagged
The GAD noted that the LGPS funding position has improved since 2016, leaving the scheme in “a strong financial position”.
Assets have grown from £217bn in 2016 to £291bn, and the aggregate funding level on a prudent local basis has risen from 85 per cent to 98 per cent, in large part due to strong asset returns and equity performance.
It said that the aggregate funding level on a best-estimate basis is 109 per cent.
The GAD operates a flag system when looking at metrics to identify exceptions under the solvency and long-term cost-efficiency objectives of the LGPS.
Red flags indicate material issues that may result in the aims of section 13, under which the GAD is reporting, not being met. Amber flags indicate issues it expects LGPS funds to be aware of.
White flags are advisory, and indicate a “general issue” that “does not require action in isolation”, while green flags indicate that there are no material issues.
The GAD’s report raised amber flags on two LGPS funds, the Royal County of Berkshire Pension Fund and the City of London Corporation Pension Fund.
The former is one of the least well-funded on a local basis, with a funding level of 78 per cent, and the worst funded on the common SAB basis.
It raised amber flags in relation to its deficit recovery period of 25 years, and its required return — where it ranks lowest of 87 funds — and its return scope.
The City of London fund raised amber flags regarding its recovery period of 15 years on the GAD’s best-estimate basis, and its required return, where it ranks 84th out of 87.
The GAD was able to remove amber flags following engagement with the London Borough of Islington Pension Fund and the Devon County Council Pension Fund.
More generally, the report highlighted that local authorities have finite resources, “and in recent years the size of pension funds has increased considerably more than local authority budgets”.
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“Given that pension funding levels change, it is not unlikely that a period of increased pension contributions may be required at some point in the future. If additional spending is required for pension contributions this may lead to a strain on local authority budgets,” it explained.
This means that funds in deficit are more likely to trigger the GAD’s “asset shock measure”, and where this is the only concern, it warrants a white flag be raised.
“We would expect that administering authorities are aware of this risk in relation to solvency and would monitor it over time. Administering authorities may wish to discuss the potential volatility of future contributions with employers in relation to overall affordability,” the report stated.
