LGPS Current Issues | November 2024
Funding matters
“Persnuffle” – to push or to pull (implications of 2024 Budget)
The Chancellor of the Exchequer, Rachel Reeves, delivered the Labour Government’s first Budget on 30 October 2024. The focus was a package of tax increases amounting to more than £40 billion. Please refer to our Budget section for further details on implications for members.
The budget also confirmed that the assets and liabilities of funded public service pension schemes, including the LGPS, will be added to the Government’s balance sheet and will see public debt being measured by Public Sector Net Financial Liabilities (PSNFL) going forwards instead of Public Sector Net Debt (PSND).
This means that LGPS funding levels will form part of the assessment of PSNFL and will be assessed as part of the five-yearly election cycle. At a time when funding levels are already at an all-time high across the Scheme as a whole, continuation of these levels over the coming years will ultimately help to reduce the UK’s debt level.
As the 2025 actuarial valuation approaches, the introduction of this change may well increase the scrutiny on LGPS, but it is perhaps unlikely it will impact directly on the governance around investment and funding strategies. Whether it forms part of the scrutiny by the Government Actuary’s Department under the Section 13 exercise and reporting remains to be seen but it could certainly form part of the discussions with Government.
Aside, the Budget also saw an increase in the level of National Insurance Contributions payable by employers although this is expected to be funded by HMT for public sector bodies (at least in respect of direct costs). The increase in local authority spending power will be an important consideration of contribution affordability for Councils although it is unlikely the employers will have clarity on this until the next Spending Review in March 2025. However. for employers who will not get the National Insurance increase funded, affordability will be impacted and will be part of contribution discussions going forwards. This will need to be considered as part of the covenant assessments of employers as part of the valuation process.
Ultimately, it will be vital for Funds to have robust funding, investment and covenant strategies in force, in particular in relation to management of surpluses, to help deal with the “push” and “pull” demands from different stakeholders linked to the above.
Please refer to further comment on this in our September 2024 edition (funding and investment sections) and speak to your usual Mercer consultant if you’d like to discuss this further.
Further Education Colleges – Guarantee
On 12 November 2024, the Government announced via a written statement that the Department for Education (DfE) would provide a crown guarantee to Further Education providers in England operating in the statutory sector. This includes Further Education corporations, Sixth Form college corporations and Designated Institutions who are bodies set up under the Further and Higher Education Act 1992 and are legally obliged to offer their non-teaching employees membership of the LGPS. Higher Education establishments are not covered.
The guarantee will operate in a similar manner to that provided for Academies and further details can be found here. It will not apply to mergers or pooled colleges (where one constituent closes). The guarantee is unlimited with the DfE being able to make payments up to £32 million per annum (across the LGPS) before approval needs to be sought from the Treasury. A letter from the local government minister to SAB was also issued on 12 November and can be found here.
The guarantee is a positive move for both Funds and employers now covered by the guarantee. It protects Funds from the potential for unfunded liabilities to emerge should a FE college exit the Fund (which would otherwise become the responsibility of all other employers). For employers, the improvement in covenant could lead to alternative approaches being adopted when setting contribution rates, with potential for reduced contributions to emerge going forwards (all else being equal). At a time when many FE colleges are facing financial difficulties reductions would of course be welcomed.
From a practical point of view, the introduction of the guarantee may lead to an increased number of queries emerging from FE employers and their advisors, perhaps even requesting inter-valuation contribution rate reviews. With the 2025 actuarial valuation just around the corner and new rates to be set from April 2026 onwards, we would recommend Funds take a pragmatic approach to such requests given the timescales involved and seek to apply to their current policies where necessary.
If you would like to discuss the implications of the guarantee further, and potential impact on your Funding Strategy and associated policies, then please contact your usual Mercer consultant.
Climate change guidance principles
Climate risk is a key systemic risk for the LGPS, potentially impacting in all areas (including investment performance, budgets and employer affordability, liabilities, operationally). For example, adaption costs may impact on employer affordability whilst creating a drag on the economy/investment performance. These impacts could be material.
The potential impact of climate risk on funding positions was first considered as part of the 2022 and 2023 actuarial valuation exercises undertaken. The key for the 2025 valuation in England and Wales will be to now consider whether any margins built into the 2022 and 2023 assumptions should now be adjusted e.g. if risk is deemed to have increased and/or it is more affordable to now do so. Discount rates are often used as the mechanism for adjusting prudence, although there are also other levers available.
In order to support considerations, the Fund will again be required to consider scenario analysis. This scenario analysis will be important to help improve understanding; however, climate risk cannot easily be quantified. Ultimately decisions around prudence will be subjective and will also need to balance affordability needs. This will be a critical consideration when deciding on both liability measurement (i.e. discount rates) and surplus strategy (buffers, offsets etc).
Updated climate change principles have been discussed between the four actuarial firms and GAD. Confirmation from GAD is now awaited on what the final principles will be for the 2025 valuation. To discuss the implications further for your Fund, please contact your usual Mercer consultant.
Other funding news in brief
FSS Guidance
It is hoped that the project to update the Funding Strategy Statement guidance will be completed soon with the guidance being made available (as statutory guidance) before the end of 2024. On 25 November the guidance was approved at a SAB meeting (having been approved at a CIPFA Board meeting on 7 November) following which a letter was issued to MHCLG by the Board Secretariat on 27 November requesting Ministerial approval.
LGPS Informer Document – feedback requested
In our previous edition, we commented on the publication of an LGPS Informer Document, produced by the SAB and the Institute of Chartered Accountants in England and Wales (ICAEW). The SAB and ICAEW are now seeking feedback on the use of this document, whether it meets its intended aim and how it could be improved and whether similar publications on different topics should be considered.
GAD request for 2024 valuation data
To assist with the 2024 cost management exercise, GAD have recently sent out data requests to Funds alongside a brief questionnaire for completion. Data extracts will need to be provided in the same format as those provided for the corresponding 2020 exercise.