7 April 2022
If you’re one of the 16,000 employers participating in one of the 89 Local Government Pension Scheme (LGPS) funds across England and Wales you’re probably wondering what the 31 March 2022 LGPS triennial valuation will mean for you and what you can do to prepare for your results.
Given that each fund invests in its own way and takes its own approach to setting contributions, it is difficult to generalise the likely results. But we will have a go!
In short, at an overall level we expect to see many funds broadly maintaining their required contributions. However, even if contributions are maintained broadly overall, some individual employers could see material increases to their contributions – particularly where an employer’s circumstances have changed or if their fund takes a different approach to setting contribution rates than they took in 2019.
Whatever happens to your contributions, the triennial valuation is a good time to reappraise your pensions strategy overall. Do you wish to continue to provide benefits via the LGPS? Do you have flexibility to change? What would it cost to exit and can you manage your exit cost?
In this blog we look at the factors influencing how contributions are set and consider some strategic questions as well.
Will 31 March 2022 be a good day for an actuarial valuation?
An actuarial valuation is a snapshot of a pension fund’s assets and liabilities based on market conditions on (or around) a particular day. For LGPS funds in England and Wales, this day is 31 March 2022.
With the conflict in Ukraine, oil price shocks, inflationary pressures and supply-side hangover from the pandemic financial markets remain volatile. Given the changes in the world over the last three years, precisely predicting the outcome of the triennial valuation for any particular LGPS fund, and particularly for any individual employer in that fund, would be a fool’s errand. But there are some general themes that we can consider in trying to answer this question and to help employers prepare.
Financial markets have generally improved over the last three years
In general, financial markets have improved since the last LGPS valuation was carried out on 31 March 2019. The position will vary by Fund, but the general rise in asset prices should mean that LGPS asset values should have risen since 2019, which should help improve funding positions.
Source: LCP Visualise
What about the pension liabilities?
Each Fund’s liabilities need to be remeasured at this time’s valuation date with reference to current expectations for things like future gilt yields, long-term inflation and members’ life expectancy.
Long term gilt yields are higher than three years ago (which often reduces the value placed on liabilities), but this is more than offset by higher expectations for long term inflation. The pandemic has meant that expectations for future improvements in life expectancy have reduced slightly, reducing liability values.
Overall, given changes in inflation expectations, we expect to see moderately higher values placed on liabilities this time than in 2019, all else equal – but we expect the effect of higher asset values to outweigh this, meaning reduced deficits in general. So some good news for employers if this happens in practice.
Contributions for future service
In a similar way to the existing liabilities, contributions for future service are likely to increase to a degree, on a like-for-like basis.
In general, at an overall level, we would not expect big changes in contribution demands – with higher future service contributions likely to be offset by lower deficit contributions. This fits in with the requirement for the fund actuary to maintain as stable a contribution rate as possible, and there are a number of levers which can be pulled to mitigate increases.
However, there are calls from regulatory authorities for more consistency of actuarial assumptions and methodologies across the 89 LGPS funds in England and Wales. For employers in Funds who are towards the bottom of the Government Actuary’s league tables, this could potentially lead to more meaningful increases in contributions.
What can we do if we are asked to pay more?
Whilst we don’t expect to see significant increases to contributions in general, if your circumstances have changed over the last three years (for instance if you no longer offer LGPS to new hires), or if the fund has changed its methodology (which can happen when they change their actuary), you could be asked for a step-up in contributions – an unwelcome surprise in the current climate.
We have worked with other organisations who have seen this in practice and we have managed to mitigate proposed increases with careful analysis of the fund’s policies and discussions with the fund and their actuary. This is definitely worth exploring if you’re being asked to pay more.
If allowing your current staff continue to build up benefits in the LGPS is untenable (due to increases in costs, workplace fairness or some other reason (eg increasing exit debts)), recently formalised “Deferred Debt Arrangements” (DDAs) can allow organisations to stop building up new benefits without triggering large one-off payments, which would otherwise be the case.
What can we do to prepare for our results?
The results of the LGPS triennial valuations are expected in early Autumn 2022 and new contributions will come into force from April 2023. In anticipation, we think you should:
- raise awareness with Boards and Finance Committees that LGPS contributions could change from April 2023;
- check whether there have been any changes in circumstances (for instance if you no longer offer LGPS to new hires) which mean you could face increases in LGPS contributions this time around;
- is it time for a wider benefit review?
- are you offering fair and attractive benefits to staff?
- do you understand the risks which pensions present to your organisation?
- what can you do to manage those risks?
- could the recently formalised DDA option mean that you could stop building up further LGPS benefits and manage your exit debt? Is the consequential reduction in cost and future risk attractive?
Please get in touch with one of our team if you wish to discuss your own situation.