Local Government Pension Scheme – current considerations

Our pensions advisers Isio update on the latest on the Local Government Pension Scheme, including the position on funding and end of year reporting, and outline some recommended next steps.

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The impact of coronavirus on the LGPS funding position

The LGPS funding position has been hit harder by the coronavirus crisis than the Social Housing Pension Scheme (SHPS) funding because it is on the whole invested in riskier assets. Whilst we estimate that the SHPS funding level has reduced by around 5% due to coronavirus, the overall LGPS funding level has fallen by over 10%, although it will be different for each LGPS fund and employer.

Some housing associations have their own schemes and we would expect them to have fared better, assuming they are hedged against interest rate risk as many are.

Flexibility in contributions

If you are in the LGPS, your new rates and adjustments certificate should now be in place from 1 April and so you might expect to be protected from increases for three years.

On the other hand, if you would like the flexibility to reduce contributions to deal with coronavirus challenges, you should approach your fund, or TPT (if you are in SHPS), or trustees (if you are in your own scheme) to seek contingency in your contributions. The Pensions Regulator is clear in its guidance that this will be in a scheme’s favour if it protects your organisation’s future.

We understand that the LGPS has not yet issued any such similar guidance to allow flexibility for employers when paying their Rates and Adjustments (i.e. contribution schedule, the new one of which came into force on 1 April 2020).

But, importantly, this shouldn’t mean that employers in a multi-employer scheme can’t look for flexibility, although arguably it may be harder to achieve in practice.

31 March 2020 financial reporting

For organisations in the LGPS, the FRS102 valuation at 31 March 2020 will again be better than under the funding measure, for similar reasons as set out above in relation to SHPS. However, there will be perhaps quite marked variation across funds due to the different asset strategies taken and how asset values have fared in the months up to the end of March. 

Understanding your own fund’s investment strategy is important if you are to meaningfully project costs and risks for business planning and govern the level of risk being taken on your behalf.

Asset valuations

There is a (limited) risk of a housing association having materially incorrect or qualified asset figures from their LGPS Fund in their FRS102 schedule at 31 March 2020. Whether this leads to a problem for individual employer accounts will depend on the fund, the materiality in the employer’s overall accounts, and the view of the individual auditor. This is likely to only be the case where the fund is invested in property or alternatives and the pension size is material within an organisation’s overall accounts. 

Recommended steps for employers

1. Contact your LGPS fund to understand how the fund is valuing assets at 31 March 2020, and timescales for this. In particular, ask:

  • Are they using 31 March data where available?
  • Are they using actual returns rather than estimated returns in relation to listed assets in any rolled forward valuations?
  • What is the approach taken to property and alternatives?
  • What is the proportion of property and alternatives in total assets?

2. Assess the materiality of your pensions in the context of your own accounts (this can be assessed based on 2019 if there are no significant changes over the year).

3. Approach your auditor to understand whether the proposed methodology is acceptable and whether any mitigation is required. In particular, confirm:

  • The materiality of any uncertainty.
  • Whether they will categorise any uncertainty in property or alternatives (or other uncertain valuations) as a 'limitation of scope' or 'abnormal uncertainty'.
  • If it might lead to a 'limitation of scope', ask your auditor what is realistically possible to avoid this, given the availability of data at the 2020 year end.

4. Put your auditor in touch with the LGPS fund if necessary.