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Phil Triggs: If LGPS managers could have one wish granted

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Last year the British Academy presented a collection of opinion pieces on health inequalities from leading social scientists. It was titled, enigmatically: “If you could do one thing…”

Each article drew on the evidence base for its author’s area of expertise, identifying one policy intervention to improve the population’s health and reduce health inequalities. Examples included a 20mph speed limit in existing 30mph zones, a living wage policy and a focus on improving life chances in early childhood.

It got me thinking. What single thing would Local Government Pensions Scheme (LGPS) managers suggest to help future-proof their funds, allowing all beneficiary promises to be kept and future pension payments to be secured?

My suggestion: I would pay off the pension fund deficit in one lump sum.

Pension contributions as they stand are determined by the LGPS regulations. A scheme employer must contribute to the fund in each year covered by the rates and adjustments certificate, which is issued by the actuary. Scheme employers must make payments based on the amount required for the whole year, and payments must be made at intervals of no more than a year.

My plan would hinge on whether an actuary would be willing to issue a rates and adjustments certificate condensing the entire deficit payment period into a single accounting period after the next triennial valuation in 2020-21 and redeem the deficit amount in one hit.

The actuary could word the rates and adjustments certificate to accept a single lump sum payment of deficit as on 31 March 2019, specifying that this relates to the annual charges for each year between 2020-21 and the end of the deficit period.

The appropriate accounting treatment would class the lump sum contribution as an advance payment, as it discharges an annual liability due in each of the years specified in the actuary’s rates and adjustment certificate. The treatment would also recognise the prepayments as assets on the balance sheet.

The advance payment would then be amortised over the period of the liabilities being discharged – whatever the deficit period is – reflecting the benefit obtained from the prepayment.

What would an employer save? In valuing the liabilities of the fund, the actuary will charge interest on the pension deficit over the entire deficit period, usually using the fund’s discount rate, used to bring the future pensions outflows to a net present value.

Employer contributions to the pension fund for the next deficit period must recover the funding deficit principal itself and the interest charged on that deficit. If the actuary values the pension liabilities using a typically prudent discount rate of 4.5%, the current return on a council’s treasury investments would be significantly less than the interest rate used to calculate interest on the pension liabilities.

Therefore, it makes financial sense to use Treasury cash to pay down the funding liability.

Much as a householder would save interest on a residential mortgage by using a windfall lump sum to pay off the total mortgage balance, once the deficit is redeemed the future principal instalment payments would also not be needed, resulting in budgetary savings to the employer.

Of course, once the pension fund is fully funded from 1 April 2020 onwards, there remains a risk of market movement, leading either to a future deficit or surplus. Such balances would be adjusted for in the actuary’s subsequent valuation cycle on 31 March 2022 and beyond.

As with most things, timing is everything. An LGPS manager might not place the entire deficit payment amount into the fund’s investments on the same day, instead feeding in tranches over time.

In today’s budgetary environment, this is a strategy obviously not open to all LGPS managers and their employers. And if you extended my starting question to anything in the life of an LGPS manager, the other potential ideas would boggle the mind.

But restricting the concept to an LGPS fund, my suggestion would probably appear in any manager’s top five. If readers have their own ideas I would be glad to hear them.

Phil Triggs, tri-borough director of treasury and pensions, Westminster City Council

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