A welcome consultation on the rules of Local Government Pension Schemes

The Government recently published a consultation seeking views on policy proposals to amend the rules of the Local Government Pension Scheme 2013 in England and Wales. 

Barry McKay, Partner and Fund Actuary, responds to a wide ranging consultation which could have a major impact on a range of stakeholders, covering the following areas: moving local fund valuations from the current three year (triennial) to a four-year (quadrennial) cycle, including a number of measures to mitigate the risks of this move; proposals for flexibility on exit payments and changes relating to exit credits, and proposals for policy changes to education employers offering LGPS membership.  

McKay said: “We welcome many of the proposals made in the consultation around the spreading of exit payments and the introduction of a “deferred employer” status. However, the devil will be in the detail and it’s key that any guidance allows funds the flexibility to achieve the best outcomes given the different circumstances that can arise.  Any guidance will be a difficult balance between providing sufficient detail to be useful with sufficient flexibility to allow funds to deal with the different scenarios arising, while avoiding any unintended consequences.

“We recognise the Government are trying to provide flexibility to administering authorities to more effectively manage their funds.  Not only are the LGPS funds very different but there is a huge range of employers who currently participate in the LGPS, meaning there are no ‘one size fits all‘ solutions.  This is why we agree that there needs to be increased flexibility in the Regulations to help funds manage their funding strategies and help employers participate in the LGPS more easily. 

“Although we are not against the move to a quadrennial valuation cycle, we do not believe the two key objectives will be achieved by this change.  Firstly, the consultation suggests the move will provide greater stability of contribution rates and cost savings; stability of rates is already a key objective of the funding valuation and this is already stated in the Regulations. It is unclear how this objective will be better achieved given fund actuaries already have the tools to achieve employer contribution stability – and have done so for many years.  Another key concern is a reduction in the level of monitoring, particularly as the number of employers in the LGPS continues to increase, currently over 15,000.  Some participate in the LGPS for a relatively short period of time – some for even less than four years.  Further, in relation to employer accounting and the recent higher scrutiny, it is unlikely auditors will be comfortable with a starting point that is four years old.

“Secondly, with a fund saving one valuation fee every twelve years, any saving will be offset by the cost of any interim valuations and the potential cost of other additional calculations that are currently not carried out – for example, more frequent valuations to achieve compliance with accounting standards.  Any saving in providing data to GAD for the scheme valuation and the Section 13 valuation will also be minimal relative to other costs incurred when providing a good service to stakeholders and the running of the LGPS pension funds effectively and efficiently.

“With many risk management processes happening in conjunction with the local funding valuations – such as investment reviews, employer covenant reviews and strategy reviews – by moving to a quadrennial cycle this change seems contradictory to good governance and risk management, which has become so important to the LGPS in recent years.”