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Government actuary: LGPS in a 'strong position'

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Local Government Pension Scheme asset pools should not fear the 2019 Triennial Valuation but should expect to be challenged if they are cutting or reducing contributions, the government’s deputy chief actuary has warned.

Speaking at the LGC Pension Insight Symposium in Stratford-upon-Avon, Michael Scanlon, deputy chief actuary at the Government Actuary’s Department, emphasised that the 2016 valuation had been broadly positive.

“We think the LGPS is in a strong financial position; we don’t have concerns over the LGPS as a whole,” he said.

The government conducts a valuation of the LGPS every three years, which among other things tracks the scale of the scheme’s deficit. Between 2013 and 2016 the deficit fell from £46.8bn to £37.2bn. The 2019 revaluation is the first since the major consolidation of LGPS schemes under the pooling programme.

One focus this year would be improving the consistency and accessibility of the process, with a new appendix being added, Mr Scanlon said.

“The funds are all in different positions. They have got different membership profiles, they’ve got different asset strategies, they’ve got different attitudes to prudence, and it is entirely appropriate that the valuations reflect those differences and we support that,” he said.

“These differences can make it hard for readers to understand reports and cross-compare their reports with their peers.”

Another focus would be evaluating progress on deficit recovery. And if it was clear funds were reducing contributions and pushing deficit recovery deadlines back as a result, this could ring alarm bells.

“We’ve got concerns if this is happening. Because what that means is costs are being taken away from current budgets and current taxpayers and pushed down the line to future generations. So, where funds are looking at cutting contributions we would expect them to be challenged to make sure that cutting of contributions isn’t worsening the long-term financial position, and it is one thing that we will look at,” Mr Scanlon highlighted.

“Part of our role is to look at individual funds and make sure that individual funds are not falling behind, both for the benefit of the individual fund – if they fall behind they are going to have higher costs in the future – and also for the LGPS as a whole. If some funds are performing badly or in trouble it has got a reputational risk,” he added.

Duncan Whitfield, strategic director of finance and governance at LB Southwark – and part of the same panel discussion as Mr Scanlon – agreed that reducing contribution rates was rarely, if ever, a good idea.

“I’m very afraid of reducing contributions; they never work in our favour. We’re working in a much bigger context here. The contribution to a pension fund by an employer is a major line in our budgets. It is competing with everything else that we do from holes in the roads to protecting children to looking after pensioners,” he said.

“It is quite dangerous when we start dabbling around with those contribution rates, so let’s not try to force contribution rates below a level, unless of course you are making contribution rates which are out of sync with what is going on elsewhere.”

On a separate note, Mr Whitfield predicted that interest in carbon reduction and ESG was going to accelerate rapidly as concern about, and the focus on, climate change grew.

“This is going to explode, I think, as a topic over the next three years; it will be a major driver for our valuations. Managing that transition from where we are today with our investments to a different place, I think carbon will be right at the top of that agenda. It will be a very interesting journey and I will be interested to see how we track the impact of that through our reviews,” he added.

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