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Local government pension scheme valuations 2013

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The latest round of triennial local government pension scheme valuations shows schemes once again battling deficits. However, funding ratios have not suffered too badly and some have even modestly improved.

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The aggregate deficit of all funds stood at £45bn.

Judged in terms of deficit reduction, the top performers were the London Pension Fund Authority, Essex, Hampshire, West Yorkshire, Cardiff, Kent, Durham, Hammersmith and Fulham and Kensington and Chelsea (see table 1).

The LPFA, which is seen as a leader in its field, cut its deficit by £387m, boosting its funding level by 10 percentage points. Close behind it was the £4.08bn Essex scheme, which slashed £282m from its deficit, leaving it at £952m.

The very large funds are expected to be run in a sophisticated fashion and tackle deficits competently and steadily.

However, Kensington & Chelsea outperforms its size. Though measuring only £629m by assets under management (AUM), the scheme cut £26m from its deficit over the three-year period.

But it hasn’t been a success story all round. On average, schemes’ assets were £1.9bn; average deficits were £519m; and the average deficit had increased by £109m. The average funding ratio was 78%, and the average funding ratio change was 0.77 points (see table 2).

The 10 funds with the greatest deficit increases - Leicestershire, South Yorkshire Pensions Fund Authority, Merseyside Pension Fund, Staffordshire, Lancashire, Avon, East Sussex, Torfaen, Norfolk, and Berkshire - presented a far grimmer set of figures than the average (see table 3).

These funds all saw deficits increase, with Leicestershire’s up £675m to £1.2bn, and Merseyside’s up £559m to £1.8bn. This is because although assets have performed well - both these funds saw their assets grow by more than £1bn - liabilities have increased more over the period.

Teesside was the only fund to report a surplus this year. By March 2013 its assets stood at £2.95bn, liabilities at £2.91bn, and so its surplus was £37m and its funding ratio was 101%. The scheme has set a repayment period of 11 years, which is slightly lower than average, and employers will contribute, on average, 14.1% of payroll per year.

Teesside’s surplus was due to a number of factors. It received a large bulk transfer payment from the Durham section of the fund, corresponding to the Durham Probation Trust pension scheme’s transfer from the Ministry of Justice to the Local Government Pension Scheme.

Return on investment above the discount rate of 6.7% accounted for a proportion of the surplus, as did an increase in contributions due to pay increases, a number of redundancies and fewer than expected ill-health early retirements.  

By contrast, the worst-funded scheme was Brent, with a ratio of just 55.6%. Its deficit doubled from £294m to £442m over the period.

By far the greatest contributing factor in this large deficit increase was a change to the underlying assumptions used to value the fund.

Brent’s report reveals that the scheme revised down its real discount rate (the rate at which it assumes investment growth, taking into account inflation) from 3.8% in 2010 to 2.1% in 2013. This move alone added £260m to Brent’s deficit over the period, while lower-than-expected investment returns added a further £26m to the figure.

TABLE 1: TOP PERFORMERS BY DEFICIT REDUCTION
Local authority2010 deficit £2013 deficit £
(surplus)
Deficit
reduction £
London Pensions Fund Authority
870m
483m387m
Essex1.2bn952m246m
Hampshire1.2bn1.08bn120m
West Yorkshire Superannuation Fund589m454m135m
Cardiff UA430m310m120m
Wandsworth115m55m60m
Kent
842m
784m58m
Middlesbrough/Teesside17m(37m)54m
Durham419m379m40m
Hammersmith & Fulham186m147m39m
Kensington & Chelsea58m32m26m

 

TABLE 2: AVERAGES
 20102013ChangeGrowth
Aggregate deficit£35.830bn£45.614bn£9.297bn25.9%
Average fund deficit£417m£519m£103m24.62%
Average fund asset value£1.549bn£1.939bn£390m25.17%
Average ratio77.23%78%0.77% points 

 

TABLE 3. LARGEST DEFICIT INCREASES
Local authority2010 deficit £2013 deficit £Deficit increase £
West Midlands Pension Fund2.6bn4.2bn1.6bn
Leicestershire529m1.2bn675m
South Yorkshire Pensions Fund Authority1.08bn1.7bn624m
Merseyside Pension Fund1.3bn1.8bn559m
Staffordshire822m1.2bn387m
Lancashire993m1.3bn384m
Avon552m876m324m
East Sussex272m541m269m
Torfaen UA530m799m269m
Surrey755m979m224m
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