Measuring and managing deficits in the LGPS: what recommendations are being made to Government?

It is estimated that funding deficits in the LGPS amount to £47 billion. Given this, it is not surprising that the LGPS Scheme Advisory Board (the SAB) has set up a deficit management working group to form a strategy aimed at having a stronger, more flexible approach to deficit management.

PwC has produced a report on “Deficit management in the LGPS”. The report forms part of the project being undertaken by the deficit management working group. The group is looking at recommendations on regulation changes in respect of deficit management in the LGPS, and how best to take this forward, following a request to the then Shadow Scheme Advisory board (the SSAB) to do so by the Minister for Local Government in 2014.

The recommendations in the report are largely being adopted by the SAB working group, which forwarded the report and its recommendations to the Department for Communities and Local Government (DCLG) in June 2015 for its consideration.

The recommendations that the SAB has made to DCLG coming out of the PwC report are as follows:

Standardised funding calculations

The SAB believes that the calculation of a measure of funding on a standardised basis is a crucial aspect of improving deficit management on a lasting basis. It will provide a means for comparison from one fund to another and allow for a consistent means via which changes in the funding of the Scheme may be viewed over time. It makes 2 recommendations in this regard:

Recommendation 1: there should be a requirement in regulations for fund actuaries to calculate comparative funding levels on a standardised basis by 30th September in each valuation year.

Recommendation 2: scheme regulations should require the SAB to set and publish assumptions for use in standardised funding calculations along with supporting commentary by 31st March in each valuation year.

Reporting of employer contribution rates

Recommendation 3: the SAB makes some detailed recommendations designed to ensure that employer contribution rates are reported in a certain way in the valuation report, broadly with the aim of ensuring that reported rates are transparent and consistent, and more closely correlate with actual contribution levels.

A minimum employer contribution rate

Recommendation 4: a recommendation that the setting of a minimum employer contribution rate should be consulted on with a view to mandating for this in regulation. It is considered that this could be a useful tool to prevent instances of employers taking contribution holidays, as has sometimes been done in the past. The SAB’s view is that an employer floor set at the average employee contribution rate would be a sensible level to consider in the first instance.

Deficit recovery plan methodology

The SAB’s view is that there should be a clear link between the individual employer contribution rates set at each triennial valuation, length of the deficit recovery period, and the approach set out in each administering authority’s funding strategy statement. Each employer should be able to clearly see the basis on which their deficit recovery period and deficit contributions have been set. Whilst it is acknowledged that in many cases this link is clear and there is a transparent approach outlined in funding strategy statements, it is important that this standard is upheld across the scheme.

Recommendation 5: regulations should require that each administering authority’s funding strategy statement sets out the recovery plan methodology adopted and in particular how it has been applied in setting employers’ deficit recovery periods and deficit contributions.

The SAB make a point of highlighting in its communications on the deficit management plan that while deficit management is an important issue for the LGPS, the SAB feels strongly that the LGPS is in a broadly positive position, given its funded nature and robust asset reserve which, in England & Wales, totals over £180 billion.

Next steps

The SAB deficit management working group has issued a 2015 project plan and a project communications plan which contain details of the further work they plan to undertake in this area this year. In particular they plan to commission the re-calculation of the individual 2013 fund valuation results on an agreed standardised basis, with the revised figures to be included in the 2014/15 scheme annual report, amongst other initiatives.

Please find a link to the PwC report at the bottom of this page from the SAB website: click here.