Published by Graeme Muir on
Estimated reading time: 4 minutes
2019 will no doubt go down in history for many reasons – probably mainly for what didn’t happen rather than what did. It is also of course valuation year in the LGPS in England and Wales, and for lots of reasons the 2019 valuation year has the potential to be one of the most exciting valuation years yet.
Despite Brexit or lack thereof, US presidents and the like, investment markets around the globe have surged ahead and a typical LGPS Fund may have seen fund values grow by maybe 20% to 30% over the 3 years to 31 March 2019 – well ahead of even the most optimistic actuarial projections.
Strong investment returns are generally a good thing – more assets to pay future pensions. However pensions are still accruing and we need new assets to fund these new liabilities. So asset prices 20% to 30% more expensive than 3 years ago may not be quite such a good thing and may mean more cash required to fund these new liabilities. It will all hinge on whether these short term excess returns means lower returns going forward.
Mortality rates have improved and longevity has increased since Adam and Eve were around, even allowing for the odd plague or war along the way.
The first 10 years or so of this century saw some of the fastest improvements in mortality rates ever seen and the various predictive models back in 2010 or so were projecting the average pensioner to live maybe 25-30 years in retirement.
However, the last eight years or so have shown little if no improvement in mortality, and what was initially considered a blip is now accepted as a bit more of a much flatter trend.
If this slowdown is replicated in LGPS Funds and incorporated into actuarial assumptions then, all else equal, this could reduce the value of future pensions paid from the LGPS by maybe 3%-5% compared to what was assumed in 2016.
One of Lord Hutton’s key recommendations in 2010 following his review of public service pensions was that retaining defined benefit schemes in the public sector should come with the condition that there is a “cost cap” mechanism to control the cost of future pension promises.
HM Treasury decided that it was mainly the “how long” a pension is expected to be paid aspect of the cost that should be included in the mechanism. So if the “how long” turned out in future to be longer than initially anticipated, we should reduce amount of pension, or “how much”, or increase the member contributions to reflect that they will get more pension payments.
Whilst the original Hutton concept was a cost “cap”, it was also argued that there should be a floor. That is, if the “how long” turned out to be shorter than expected, we should increase the “how much” or reduce member contributions. Of course there was no chance this would ever happen…
Ironically, the resulting cost cap mechanisms were built just as the slowdown in longevity improvements started to appear. So at the first time of asking, the mechanism designed to cap pension costs has in fact produced numbers that indicate the “how long” might not be as long as we thought, triggering a review of the “how much”.
So plans were quickly hatched to increase the “how much” and then, just as we were about to get these changes in place, along comes the judgement on the McCloud/Sargeant case. All those quite sensible transitional changes to public service schemes when moving from final salary to career average are now deemed, or likely to be deemed, to have been unlawful, mainly on age discrimination grounds. The government is hoping to be able to appeal this judgement but, on the basis that this is likely to take quite a while, the cost management process has now been paused. The promise has been made that whatever needs to be done will be backdated to 1 April 2019. Now there is a challenge.
So, apart from the usual actuarial assumptions, we may also have to make some assumptions about the outcome of the McCloud appeal and the cost management process once we hit the play button again. On the basis that nothing will have been sorted out before we need to start reporting preliminary valuation results, the Scheme Advisory Board is to issue guidance to funds and actuaries on what to do. Do we just ignore for now and revisit employer contributions once sorted? Or do we make some assumptions about the outcome and reflect this in employer contribution rates, to be resolved at the next valuation?
This is widely expected to be 2024 and likely to be for LGPS Funds both north and south of the border. So that means five years after the 2019 valuation in England and Wales. The obvious question is why? The answer is so that LGPS Funds fall into the same four year cycle as the other public sector schemes. This apparently is sensible because the funded LGPS, after all, is just like these other schemes (apart from having 100 or so separate funds, actual assets and 16,000+ employers all paying contribution rates specific to their circumstances).
So lots of challenges ahead when it comes to completing the 2019 valuations and scope for possibly more excitement than LGPS Funds and their actuaries really need in such a busy year. There will be lots of excited actuaries out there crunching lots of exciting numbers – the challenge as ever will be trying to spot one.