Preparing for the 2019 Local Government Pensions Scheme (LGPS) valuation

The LGPS valuation date of 31 March 2019 is looming.

7 December 2018

Gilts yields are lower and inflation is higher than three years ago, so there is good chance deficits will have increased from the total £38bn at the last valuation. However, it will depend on the asset returns for individual LGPS funds and the funding treatment applied by each of the Actuaries.

Engaging with your fund

On the whole, asset returns have been strong since the last valuation. Your organisation may want to consider estimating its current funding level, and if favourable, engaging with your fund to crystallise the position. Your fund may not allow any funding improvements to automatically feed through into lower contributions from 2020, however, if markets move against you over the next few months you will have set down a marker now, rather than talk in hindsight at the time of the 2019 valuation.

The earlier you engage, the better your organisation’s chances of influencing the valuation outcome.

Employer cost cap

A cost cap mechanism is in place for public sector schemes, designed to ensure public service pension schemes remain affordable and sustainable for 25 years.

In theory employers pay no less than a fixed floor and no more than a fixed celling, and if costs exceed the ceiling then action is taken to bring it back in line with target cost.

This is measured every four years in line with other public service valuations. For the LGPS there is a 2% buffer either side of 19.5% for employer future service rates.

Perhaps surprisingly given the general trend for increasing pension costs, on 6 September 2018 the Treasury announced the floor had been breached, which actually means a benefit improvement may be on the agenda. This is because the test only allows for demographic changes such as the dampening of life expectancy increases, and does not allow for changes in market conditions. This means the impact of lower gilt yields and higher inflation is not taken into consideration.

The default benefit improvement is an improvement to the accrual rate, however it might be that there is some nominal tinkering around the edges instead, for example reducing member contribution rates. All will be at the expense of increasing employer contributions.