LGPS valuations place employer contributions under scrutiny
0‘Excitement’ is rising over LGPS as the contributions made by employers move into the spotlight, according the Graeme Muir.
The 2016 valuation of the English and Welsh LGPS funds is now underway. Section 13 of the Public Service Pensions Act 2013 will also come into play at this round of valuations.
One of the requirements of Section 13 is for the Government Actuary’s Department (GAD) to provide an actuarial opinion on whether the rates of employer contributions certified at the 2016 valuations have been set at an appropriate level to ensure:
- the solvency of each pension fund
- the long-term cost-efficiency of the scheme, so far as relating to each pension fund.
So, in setting contribution rates at this round of valuations, fund actuaries will have to try and second guess GAD’s post-valuation opinion.
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We have a broad idea of how GAD will make this assessment but they do not plan to provide full details in advance.
If they do not believe contributions have been set at a sufficiently high enough level to meet these tests then there is ultimately the possibility that the certified rates will be over-ridden.
For some funds who currently have longer term recovery plans this could mean having to increase contributions more quickly than previously envisaged.
For others who look like they are paying more than enough there could be the temptation to take the foot off the gas a little.
It’s almost akin to the Minimum Funding Requirement that applied to private sector schemes a few years ago.
Designed to improve overall solvency levels but in fact arguably resulted in less contributions being paid into schemes rather than more.
Another more subtle issue that will arise as a result of these changes in legislation is that ensuring solvency and long term cost efficiency now seem to be the key funding objectives and the stability of employer contributions objective is third in the queue. The draft Funding Strategy Statement guidance recently issued by CIPFA says: “Administering authorities are reminded that securing solvency and long term cost efficiency is a regulatory requirement whereas a constant as possible employer contribution rate remains only a desirable outcome.”
So, as ever, this round of LGPS valuations will provide a fresh set of challenges for all concerned and help keep lots of people quite excited about them – even some actuaries.
Graeme Muir is head of public sector at actuaries Barnett Waddingham.