Exciting times for actuaries predicted

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.

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.

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?