As the Local Government Pension Scheme (LGPS) begins its latest triennial funding valuation (as at 31 March 2022), Quantum Advisory has explored the key issues likely to unfold in 2022 and beyond, warning employers who use the LGPS to provide pensions for their employees to review its strategy to avoid potential problems in the future.
The LGPS has over 6 million members and 18,000 participating employers across the 80+ different LGPS Funds. Each individual Fund will see differences in their 2022 valuation results. Ahead of the results being published later this year, Michael Welford, a senior member of Quantum Advisory’s specialist LGPS advisory team, said: “The last valuation was carried out as at 31 March 2019 and the results showed a total combined deficit of c£5.9bn and a funding level of 98%.
“With the cost of living crisis filling headlines, short term inflation rates are currently at levels not seen for many years. However, it is the long-term expectation of future inflation that is used to place a value on the LGPS pension liabilities and while not as high as short term inflation, we could potentially see a c5% increase in LGPS liabilities.
“Another major factor in calculating liability values is the mortality assumption, i.e. how long members are expected to live for. There is currently a lot of uncertainty around future mortality improvements with differing views on whether the long-term impact of the Covid-19 pandemic will be to increase or decrease future life expectancies. We expect the LGPS Funds’ actuaries will choose to make no allowance for the heavy mortality seen over recent years whilst they wait for credible evidence on the long-term effects of the virus.
“In terms of asset movements, based on a typical LGPS Fund investment strategy which is invested approximately 70% in equities, 20% in corporate bonds an 10% in gilts, we would expect a three-year return of around 23% (or 7% p.a.). We would therefore expect asset performance to have a positive impact on the 2022 results across the LGPS Funds.
“So overall we do not expect there to be a huge change to the funding levels of LGPS Funds, which is good news for those employers who participate in them.
“In 2019, the cost of providing future LGPS benefits varied from 20% to over 35% of pay. The calculated cost of funding future service is not directly impacted by positive asset experience and, therefore we would expect to see an increase in required future service contributions as a result of the 2022 valuation. Not good news for those employers who have employees building up new LGPS pension each year.
“With so much uncertainty, it is vital that employers take steps now to review their LGPS strategy to make sure they avoid big problems in the future. Having sight of the key issues and the potential options available at an early stage is critical for an employer when managing any defined benefit pension scheme, and managing the LGPS is no different.”