• Home
  • About
  • Newsletters
  • Conference
  • TMS Links
  • Calendar
  • Log In
  • Register

Room 151

  • 151 BRIEF

    What's New?

  • LGPS infrastructure partnership invests £1.8bn in renewables

    December 12, 2019

  • Brunel appoints global high alpha managers

    December 11, 2019

  • City of London completes £250m debt deal

    December 11, 2019

  • Mystery bidder appointed on £250m waste contract

    December 11, 2019

  • Investors withdraw from property fund

    December 11, 2019

  • Highland councillors back tourist tax

    December 11, 2019

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Jobs

Graeme Muir: exciting times for actuaries predicted

0
  • by Guest
  • in LGPSi · Technical
  • — 17 Apr, 2019

Pensions are supposed to be boring – public sector pensions even more so.  Actuaries are only supposed to get excited very occasionally and when they do, it’s often hard to tell that they are excited.

2019 will no doubt go down in history for many reasons – probably mainly for what didn’t happen rather than what did. It is also of course valuation year in the LGPS in England and Wales, and for lots of reasons the 2019 valuation year has the potential to be one of the most exciting valuation years yet.

So why all the excitement?

Asset returns

Despite Brexit or lack thereof, US presidents and the like, investment markets around the globe have surged ahead and a typical LGPS Fund may have seen fund values grow by maybe 20% to 30% over the 3 years to 31 March 2019 – well ahead of even the most optimistic actuarial projections.

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 big longevity slowdown

Mortality rates have improved and longevity has increased since Adam and Eve were around, even allowing for the odd plague or war along the way.

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.

Cost management and McCloud

One of Lord Hutton’s key recommendations in 2010 following his review of public service pensions was that retaining defined benefit schemes in the public sector should come with the condition that there is a “cost cap” mechanism to control the cost of future pension promises.

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?

And talking of which, when will the next round of valuations be?

This is widely expected to be 2024 and likely to be for LGPS Funds both north and south of the border. So that means five years after the 2019 valuation in England and Wales. The obvious question is why? The answer is so that LGPS Funds fall into the same four year cycle as the other public sector schemes.  This apparently is sensible because the funded LGPS, after all, is just like these other schemes (apart from having 100 or so separate funds, actual assets and 16,000+ employers all paying contribution rates specific to their circumstances…)

So lots of challenges ahead when it comes to completing the 2019 valuations and scope for possibly more excitement than LGPS Funds and their actuaries really need in such a busy year.  There will be lots of excited actuaries out there crunching lots of exciting numbers – the challenge as ever will be trying to spot one.

Graeme Muir is partner and head of public sector at Barnett Waddingham.

Share

You may also like...

  • Disruptors: How technology will change the face of treasury 4 Oct, 2017
  • Ernst & Young, EY, Newham Newham in danger of missing deadline to publish accounts 19 Apr, 2018
  • Warwickshire’s Phil Triggs enters Room151 Warwickshire’s Phil Triggs enters Room151 15 Dec, 2011
  • Draft letter casts doubt on savings claim for LGPS pools 18 Aug, 2016

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room 151 3 days ago

    Court rejects NHS trusts’ claim for millions in business rates relief: A judge yesterday threw out a claim by 17 NHS trusts that they are charities and should receive millions of pounds of business rates relief. Derby Teaching Hospitals NHS Foundation[...] dlvr.it/RL8F7D pic.twitter.com/fxt6Sor3Q7

    Room 151 3 days ago

    Authorities turn away from PWLB in favour of borrowing from peers: Councils borrowed just £80m through the Public Works Loan Board (PWLB) during the first full month since the Treasury’s rate rise, a mere 4% of August’s total. Just two authorities[...] dlvr.it/RL8F57 pic.twitter.com/zIOf1KlNpc

    Room 151 3 days ago

    County introduces new rules after £9.1m funds gaffe: A report to Hertfordshire’s most recent audit committee meeting said the “treasury control failure” had come to light in August, one day after the multi-million-pound redemption was not received.… dlvr.it/RL5DP0 pic.twitter.com/6LvY71zUew

    Room 151 4 days ago

    News just in - #WorkingtonWoman is believed to represent roughly half the electorate in Workington.

    Room 151 4 days ago

    LGPS urged to put the ‘social’ back into ESG: LGPS committee members and managers have been asked to elevate the importance of the “S” in ESG (environmental, social and governance) to help protect workers’ rights as the world confronts[...] dlvr.it/RL1c9p pic.twitter.com/xv590d3qm8

    Room 151 5 days ago

    Room 151’s top 10 news stories of 2019 room151.co.uk/treasury/room-… #localgov

    Room 151 5 days ago

    Room 151’s top news stories of 2019: As an eventful year for local authority treasurers draws to a close, Room 151 takes a look at the top 10 stories from the sector during 2019. 10. Spending watchdog[...] dlvr.it/RKy49q

    Room 151 1 week ago

    Council files £130m claim against PFI contractor for post-Grenfell estate costs: London Borough of Camden is suing a former PFI partner and its main subcontractors for £130m for costs relating to the evacuation of one of its housing estates the week[...] dlvr.it/RKkR8C pic.twitter.com/zIfQcikMjq

    Room 151 1 week ago

    Review highlights ongoing financial management issues at Northamptonshire: Northamptonshire County Council’s new section 151 officer should draw up plans to repatriate powers from government commissioners amid ongoing problems with financial management,… dlvr.it/RKjLkN pic.twitter.com/tQIxMDawQV

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Iain Campbell: The challenge of measuring carbon emissions
  • Next story LGPS funds urged to speed up pace of ESG reforms

© Copyright 2019 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK