Hot topics around the LGPS Richard Warden, Partner & Fund Actuary 24 October 2018

Lots happening (as ever!) National oversight Cost management process Section 13 valuation New regulations - Exit credits Life expectancy trends And in brief …

What is cost management? Secondary contribution Aim is to ensure affordable and sustainable public sector pensions

How does cost management work? E’er 13% E’ee 6.5% 31 March 2014 31 March 2016 ??% 21.5% of pay 17.5% of pay 19.5% of pay Benefits are amended if 2% of pay buffer is breached. Asset returns and market movements are ignored. Initial results in E&W LGPS suggest that cost has reduced.

Long term cost efficiency Section 13 valuation “Section 13 provides an independent review (by GAD) of the valuation and employer contribution rates to check that they are appropriate, and requires remedial action to be taken where that review identifies a problem.” Have valuations been completed in accordance with the Regulations? Compliance Has a Fund’s valuation been completed on a basis “not inconsistent” with other Funds ? Consistency Will certified contributions accumulate enough assets to meet liabilities over an “appropriate” period? Solvency Are certified rates “enough”? Are employers kicking the contribution can down the road? Long term cost efficiency A high level health check on funding in the LGPS

Overview of 2016 Local Valuations in E&W Monday, 29 April 2019 Overview of 2016 Local Valuations in E&W Funding levels have improved 2013 87% => 2016 95% (SAB standardised basis) Mostly due to better than expected asset returns Also reduced life expectancy a factor Actuaries more cautious about economic outlook => for many funds average employer contribution rates have increased Source “Public service pensions: actuarial valuations and the employer cost cap mechanism” (report prefacing the directions) Another key objective of public service pension reform is to ensure a fair balance of risks between scheme members and the taxpayer. To achieve this, the government will establish an employer cost cap mechanism in the new public service pension schemes. Changes in costs which arise from technical or financial changes will not affect the cost cap. Only those which relate to members – such as changing expectations about life expectancy, salary growth or career paths – will be included in the cap mechanism. Report on Scottish funds due next year Government Actuary’s Department www.gov.uk/gad

“Pass-through” is becoming increasingly popular Exit credits Affects all Scottish cessations triggered from 1 June 2018 Ceasing employers entitled to receive any funding surplus via an “exit credit” Implications for both funds and employers: no transitional arrangements refund is not taxable (in E&W at least..) is funding risk truly symmetrical? communication and documentation “Pass-through” is becoming increasingly popular

Will we keep living longer? What does this mean for the LGPS?

Observed life expectancies in Scotland High life expectancy Mid life expectancy Low life expectancy Small reduction in recent years

Future improvements stalling Most LGPS liabilities Slowdown in improvements Slowdown in life expectancies should reduce liabilities and employer contributions

And in brief … 4 yearly valuations in the LGPS E&W SAB “separation project” Unfunded schemes – employer contribution rate rises Data quality and the TPR