LGPS is close to full funding in aggregate but will contribution levels still have to rise?
The 2016 Section 13 report on the LGPS by the Government Actuarial Department is at long last published. It provides a more consistent basis for comparison between funds and follows the ‘dry run’ published in 2017 on the 2013 valuation.
One major purpose of the Section 13 report is to review the long-term viability of the Scheme and highlight where measures need to be taken. Given benign asset markets and higher contributions, it is no surprise that there has been a marked improvement here. On GAD’s best estimate basis (without the level of prudence embedded in local actuarial valuations), the LGPS as a whole was 106% funded in 2016 and roughly 2/3 of individual funds had funding levels of over 100%. Since March 2016, of course, funding levels will have risen substantially higher.
The second purpose of the report is to promote consistency so that comparisons between funds are easier. Here their major comments are aimed at the four actuarial firms who serve the LGPS, and they focus particularly on the range of discount rates and mortality contributions used. Their major point is that these seem to be done not on justifiable local differences but simply according to which actuary is used.
The report distinguishes between ‘presentational’ and ‘evidential’ consistency. It is hard to argue against the former and GAD suggests a dashboard approach. The latter is more complex: the actuaries argue with some reason that enforcing a single methodology would reduce innovation and evolution. We would also argue that there is some systemic risk if all actuaries are forced to use the same model, as they have for example in the private sector.
The Section 13 report also provides an Asset Liability model to try and identify whether contributions might need to go higher. It concludes that in about 75% of scenarios there will be a rise. However, this is based on explicit assumptions which we would argue are unrealistic, primarily that the conditions prevailing in March 2016 (ie. extremely low bond yields and, after seven years of QE, very low asset price volatility) would continue.
With asset prices nearly 20% higher, gilt yields no lower and secondary contributions falling away, we would challenge the report’s assertion that higher contribution levels will be needed generically. If the GAD report does turn-out to be correct, and contributions have to rise when the Scheme appears fully funded, top class employer communications are going to be vital.