LGPS Current Issues | September 2024
Funding matters
2022 valuation Section 13 report
MHCLG recently published the Government Actuary’s Department’s Section 13 report on the 2022 LGPS valuations for England and Wales.
Overall, as expected the results showed a positive funding position for the LGPS, with 70% of funds now reporting a funding surplus and an aggregate funding level of 106% on a local basis as at 31 March 2022 (119% on the standardised GAD “best estimate” set of assumptions – i.e. excluding prudence). Additionally, no red flags and only a handful of amber flags were raised as areas of concern for individual Funds.
Given the strong financial position quoted, and the limited number of flags to emerge, this highlights the hard work, improved governance and strong performance of Funds. However, given the additional focus / scrutiny the Scheme now faces in light of the Pensions Review announced following the election, Funds will need to continue to evolve as the landscape changes to ensure they can meet the challenges that lie ahead.
The report set out recommendations relating to consistency (supported by central guidance) and also solvency and long-term efficiency, focusing on the use of surplus and recovery of deficits. We’ll continue to liaise with GAD, SAB and other stakeholders in light of these recommendations as planning for the 2025 valuations continue. We also provide further comment further below on surplus management.
Surplus management (Funding)
As referenced in the investment section, the issue of surplus management will be a key area of focus for many funds as part of the 2025 actuarial valuation exercise.
Crucially, even where the whole Fund is not in surplus, there are likely to be individual employers who have moved to a surplus position for the first time, or their surplus has increased. Many employers may have unrealistic expectations on both the amount of surplus and access to it, so it is crucial that Funds plan well ahead and start to consider strategy now, to control the dialogue and support effective budget management by employers, where possible.
In addition to employer budget implications, it is crucial that your funding and investment strategy are truly joined up. It has never been so important to have a fully integrated approach to funding and risk management, to ensure your policies are robust, transparent and fair, whilst ensuring the overall strategic objectives of funds can be met.
From a funding perspective, the following questions should be considered:
- How much risk should the Fund take now, and in the future.
- How can the funding, investment and employer covenant strategies be integrated?
- What is the minimum long-term contribution that should be targeted?
- What level of surplus should be shared with employers – which employers could benefit from this?
- How will the strategy implemented serve to ensure inter-generational fairness?
If you’d like to discuss such these issues further, then please contact your usual Mercer consultant.
As recognised risk specialists under the framework, we have an established track record in bringing together your external advisers to ensure a fully coherent approach to risk management, which includes exploiting opportunities as well as navigating risks.
Spotlight on Charities:
exit pathways
Employer exits continue to attract a lot of attention - termination costs remain low relative to historic levels and material surplus payments are on the table for some.
Employers are increasingly asking whether they can “lock” this in, either by reducing investment risk or fully/partially exiting the LGPS. Whilst this may be seen as good news by some employers, an exodus of employers from the LGPS will have implications for members’ future benefits in addition to the funding and investment considerations that Funds are currently working through (not least where to pitch the termination basis and evolution of strategy for exit credits).
However, within the midst of all that, there is a group of employers – charities – where an exit, where this is now affordable, could present a win-win-win situation for Funds, charities and their employees (e.g. if this secures long-term viability for the charity and therefore job roles). For Funds, ahead of, or as part of the next valuation, officers should take stock of the position and consider whether there are any employers nearing termination who would perhaps benefit from being informed of the process and movement in exit costs in order that they can make informed decisions about their participation in the Fund.
Virgin Media – appeal dismissed
25 July 2024 saw the Court of Appeal dismiss the appeal brought by Virgin Media against the current Trustees of the NTL Pension Plan following an earlier High Court ruling which found in favour of the Trustees.
The Court of Appeal ruling confirms that any amendments to pension scheme rules in respect of certain rights (which were made without the necessary actuarial certification regardless of whether such amendments were positive / negative to the member) are void and apply to rights built up before and after the change in the rules.
In relation to the LGPS, HMT is currently assessing the implications across all public service pension schemes and further details are now awaited. However, Fund Officers may see a step up in employer queries in relation to the matter, now the result of the appeal is available, in the context of their accounting figures, and if so, they should be directed to any supporting information provided with their schedules in the first instance. Ultimately though, this is a complex legal/audit issue and so employers would need to liaise accordingly with their advisors if required until the position becomes clearer.
New informer document issued for LGPS
In June 2024, an informer document was jointly released by the Institute of Chartered Accountants in England and Wales (ICAEW) and SAB which outlines the steps and details for the actuarial valuation and accounting/audit procedures.
The document is primarily for Scheme employers and their external auditors, although fund officers and actuaries will also find it beneficial.
This practical document provides valuable insights into various aspects, including:
- How the LGPS operates in practice.
- Key information flows between employing bodies, pension funds and actuaries.
- The content and purpose of annual accounting reports and triennial valuations.
- Key accounting requirements for employing bodies.
- The role of external auditors.
Other funding news in brief
FSS Guidance working group
Work by the Compliance and Reporting Committee on the updates to the FSS guidance remains in full swing. New guidance is anticipated to be available by the end of the year so that this can be considered and taken into account for the 2025 valuations.
Exit credit consultation (Scotland)
The SPPA recently consulted on regulatory changes that would introduce a discretionary power for administering authorities to determine the amount of exit credit payable to an exiting employer and to implement a six-month deadline from the exit date to pay exit credits (or such longer period agreed between the authority and the employer). In July, SPPA announced that due to the number of responses received, which were higher than expected, changes to the draft regulations have been put on hold over the summer. This won’t impact the “effective” date, just the date the regulations come into force.
ESFA as Guarantor of Academy Schools
SAB have stated that as the Educational and Skills Funding Agency (ESFA) is the ultimate guarantor of academy schools, they are a body whose rights and/or liabilities under the Scheme may be the subject of decisions made by the administering authority. This is consistent with the position for other guarantor bodies within the Fund.
This is likely to be relevant for the exit of an academy school and the ESFA would be entitled to make representations as to its interests through this process and be kept informed of any developments. Similarly, subject to any particular termination policies in force for a particular Fund, should an academy exit with a surplus on the termination basis, the ESFA should be invited to make representations for this to be paid.