LGPS is on a ‘strong footing’ but challenges lay ahead

Recent research reveals LGPS staffers to be confident while finances are robust and deficits dramatically reduced. Tiffany Tsang writes that the scheme still needs to be on alert. Proposed reforms and implications of the McCloud Judgement will need careful management.

The global pandemic has, among other things, wreaked havoc on employers across all industries and the Local Government Pension Scheme (LGPS) has not been completely immune.

While the effects of the virus will vary for administering authorities across the country, the overall picture emerging–how the LGPS is faring under such difficult global and domestic financial circumstances–is still encouraging.

Healthcheck

The PLSA’s spring survey results give us a snapshot view showing that for the immediate to medium term, at least, cash flow should not be an issue.

Our survey found that 50% of LGPS respondents were only “slightly concerned” about employer strength, with the other 50% “not concerned at all”.

Even in the face of such overwhelming external economic pressures, the LGPS is able to continue paying pension benefits to members, which is the key metric for success at the moment. In fact, 100% of LGPS survey respondents said they were confident in meeting payment obligations to members over the coming months.

However, 38% of LGPS respondents have concerns about future pressures on employers, as the long-term impact of Covid-19 and, therefore, cash flow remain unknown. Particular attention should to be paid in the coming months to the emerging situation facing colleges and universities, charities, leisure centres, housing associations, and other community associations with historical ties to local authorities.

The Scheme Advisory Board’s (SAB) 2020 annual report for England and Wales also shows that the LGPS was in a positive cash flow position in 2019, with a £15.14bn total income due to contributions, transfers in from other pension funds, other income, and a net investment income. Total expenditure was £12.86bn over the same period.

These figures help provide a wider context for the confidence we saw in the PLSA’s spring survey, which saw funds confirming they were able to meet obligations to members.

Overall, the SAB annual report confirms that the LGPS entered into the global pandemic on a strong financial footing, helping to hold the scheme in good stead.

LGPS deficits were down to £6bn in 2019 from £37bn in 2016, with the LGPS remarkably trimming its funding deficit by over £31bn in just three years. Total assets also increased 6% from the previous year, reaching £291bn.

While the SAB annual report does contain some rosy figures, we must remember that the data is from before Covid-19 appeared on the horizon. Next year’s report will likely show a less strikingly positive picture.

Administration

Cash flow is only part of the picture in judging the LGPS’s success weathering the pandemic: administration is another puzzle piece.

The PLSA’s survey found that 100% of LGPS respondents felt that their contingency plans were coping well. Before the arrival of Covid-19 the Pensions Regulator (TPR) had urged “business continuity” to be a priority across the LGPS and those preparatory measures have paid off. However, challenges remain: 57% of LGPS respondents report pressures with remote working, including difficulty with serving member requests, and 40% have experienced a staff shortage.

In the economic downturn, difficult decisions will likely have to be made about cuts to public services. The PLSA would urge that pensions teams within all administrating authorities be allowed to maintain the resources needed to continue delivering member benefits effectively.

There are important administrative changes not far down the track, including data assessment work for the McCloud Judgment, GMP Equalisation and the Dashboard. They will affect millions of savers and there are billions in benefits at stake. As such, the LGPS will need its best and brightest leading the charge with properly resourced teams behind them.

Bump in the Road?

The application of the McCloud Judgment in particular could have a significant impact on the LGPS in the coming years. As usual, the devil will be in the detail.

In this case, those details began to emerge in the long-awaited consultation document from the Ministry of Housing, Communities and Local Government (MHCLG) released this July.

The proposals seek to revise the LGPS statutory “underpin” protection. The estimated cost to LGPS employers is £2.5bn in the coming decades. This will undoubtedly impact employer contribution rates, and ultimately, cash flow for the foreseeable future.

Each fund should immediately begin to assess the scale to which the proposals will affect its membership. The work ahead is sizeable, but not insurmountable. The PLSA will be working with its members on a consultation response.

The evidence we have demonstrates that the LGPS remains on a strong financial footing.

While cash flow remains a risk during these uncertain economic times—especially with additional pressures placed on it through the important, but costly, application of the McCloud Judgment—it is one that can be effectively managed, so long as the LGPS is allowed to maintain the resources that it needs to do its job, which is to safeguard members’ benefits.

In the meantime, the ongoing resilience of the LGPS is something that should be celebrated.

Tiffany Tsang is senior policy lead on LGPS and defined benefit schemes at the Pensions and Lifetime Savings Association (PLSA).

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