Review of SF3 data – is the LGPS slide to negative cashflow accelerating?
Two years ago I published an article on LGPS cashflow trends following publication of the annual SF3 forms (data at 31st March 2017). I pointed out that aggregate contributions fell short of pension payments by about 0.4% of total assets and that the gap was bridged by a 1.5% cash inflow from investments. I compared the numbers with 2011, when there had been a 0.8% surplus of contributions over payments and investment income brought in an additional 1.9%. I pointed out that the Scheme would, if the rate of deterioration continued, be cashflow negative by 2024.
Two years later I have reviewed the same data as at 31st March 2019. Since then LGPS assets have risen by a total of 6% and, when the actuarial valuations of the same date are finally published, funding ratios for most funds are expected to be in a healthy 90% to 110% range. However, financial solvency should not lead us to ignore the issue of deteriorating cashflow as the Scheme matures.
This year’s SF3 data again comes, as ever, with some caveats: 2019 income is understated because some employers chose to ‘pre-pay’ three years’ contributions in 2018; there were some large transfers for a variety of reasons which distort the data; and investment income may well not capture the incoming cash inflows from all investments (eg. private equity distributions).
However, the 2019 numbers do appear to confirm the slide to negative cashflow I highlighted two years ago. It may well even be accelerating. Total outgoings (including management and investment costs) were £12.7bn, up from £11.8bn in 2017. Pension payments rose by 9% over the two years but other costs charged to the fund by 27%. This may reflect the extra costs of pooling as well as investment costs resulting from the growth in assets.
Contributions in 2019 were £9.3bn, which left the Scheme with a shortfall of £3.4bn before investment income. The latter amounted to £4.4bn on the data. In aggregate the LGPS therefore only had net cashflow of £1.1bn - or a miniscule 0.3% of assets. Even adjusting to allow for contribution prepayments, the net cashflow number was below 1% of assets, a further fall from 2017’s 1.1%.
As you’d expect, individual funds are in different places. Two years ago I highlighted ten funds which weren’t particularly mature but had negative cashflow even after taking investment income into account.
In 2019 38 funds had negative cashflow on this basis, though 19 of them were positive once net transfers out were taken out of the calculations. Of the other 19, nine are less mature in the sense that the ratio of active members (ie. paying in contributions) to pensioners (ie. taking their pensions) is greater than the national average. In theory, they have longer to put strategies in place which will ensure they do not run out of cash.
However, five other funds are significantly less mature (ie. the ratio is less than 80% of the national average) and it is these five funds which most worry me. If I were advising them, I would be encouraging a strategy of putting in place reliable income to match their cash outflows. And yet according to the SF3 data none of them is receiving investment income of more than the national average and two, both London boroughs, are receiving less than half.
I also note that both these two are receiving markedly less in dividend income than the national average, perhaps because they are invested in accumulation rather than dividend paying units of collective investment schemes. That could well be an issue to look out for in the pools which are now responsible for implementation.