William Bourne comments on an actuarial disagreement over the LGPS Section 13 'dry run' report'
The Government’s Actuarial Department (GAD) quietly published over the summer a ‘dry run’ of the standardised comparison it will make of LGPS Funds as part of the 2016 triennial valuation (‘Section 13’). The dry run used the 2013 numbers, and focused on compliance, consistency, solvency and long term cost efficiency. It is intended to provide both actuaries and funds with a foretaste of what will be required next time round. Since then, GAD, alongside the actuarial firms, has presented its findings to funds around the country.
Inevitably the headline focus has been on the solvency numbers, where on GAD’s standardised basis the median fund’s funding level at 2013 has risen from 78% to 86%. A number of funds are now at or near full funding on this basis, while only seven funds have funding levels below 75%, compared to 34 according to the original local valuations.
The interesting debate is in the area of consistency. GAD makes clear its view that the actuarial firms could and should aim for more consistency in areas such as definitions, mortality rates, salary inflation assumptions and investment horizons. For example, they make the point that a male 45 year old starting at Richmond on £20,000 is assumed to be on £25,154 salary at the age of 65, whereas at nearby Sutton the figure is £30,499. GAD also points out that, in some cases, there is a significant gap between actual paid contributions and the stated contribution rates.
The four actuarial firms have responded robustly to what are clear, if coded, criticisms. They have questioned whether this exercise fulfils Section 13’s original intentions and are worried about it being used as a tool to ‘over-ride’ individual local valuations. They also accuse GAD of using overly blunt methodology and initiating both ‘a race to the middle’, ie. focusing on metrics for the fund rather than individual employers, and ‘a race to the bottom’, ie. a move to the lowest common denominator, and less prudence.
Even if these criticisms are to an extent justified, the actuarial firms are missing the point in my opinion. Consistent comparison between funds, even if not actuarially perfect, is badly needed. Administering authorities and pension boards need the data to be able to monitor their fund’s performance against the peer group. Until this report, it has been almost impossible for the non-expert to do.
Perhaps the final question goes back to the fundamental question of what is prudent. While GAD is at pains to point out that this is only a ‘dry run’, it is clear that under this exercise funding levels at many funds are significantly higher than under the actuaries’ individual valuations. The Scheme Advisory Board has begun to publish the first 2016 numbers on an anonymised basis. So far the range is 78% to 123%, with only 4 out of 28 below 90%.
It is pertinent therefore to ask the question whether some of the actuaries are being excessively prudent and is the LGPS actually in a better position than we thought? If so, is the Government perhaps aiming at the wrong target in the reforms it is pushing through the LGPS? Alternatively, is GAD being excessively imprudent, in which case the Government may wish to look at the ‘solvency’ of its unfunded public sector pension schemes more carefully.
* A version of this article also appeared on on 12th October 2016