Local Government pension schemes (LGPS')

04 January 2019

2018 saw the return of volatility to markets with sharp sell offs in February, March and October, as inflation began to reawaken in developed markets and interest rates began to rise. Geopolitical issues continuing to spark up throughout the year, notably between the US and North Korea, and the high flying US tech stocks coming under increasing pressure from politicians in both the US and Europe. Whilst it is tempting to reflect on the last 12 months, it is the future that will drive the health of pension funds across the UK, and 2019 looks to be another important year for the LGPS.

POOLING

Pooling needs no introduction, as it has become a large part of anyone working within the LGPS’ life. A number of Pools had an important 2018, becoming operational, appointing investment managers, taking on assets and hiring full time staff. For these Funds, 2019 will see a continuation of this as they move through their business plans to make more asset classes available and take on more assets. Other Pools are not yet at this stage, in which case 2019 will see them continuing to develop their approach to pooling as the Government provides further clarification on what is required.  

For individual Funds, the investment opportunity set may be changing based on what their Pools are offering to them. Funds will also need to assess the investment opportunities as they become available through the Pool, ensuring they offer an attractive alternative to their current arrangements.  

TRIENNIAL ACTUARIAL VALUATION

2019 will see all 89 LGPS Funds undertake their triennial actuarial valuation. This has important implications for the Funds and their employers, as it will be used to, among other things, determine the contribution rates that employers will need to pay over the next few years. It is likely that Funds will generally see a gain in their funding level, given the strong returns in markets over the last three years and generally subdued inflation offsetting the effect of falling yields. This will mean a decision is required regarding investment risk or employer contributions.

INVESTMENT STRATEGY

The actuarial valuation is always an appropriate point to do a “root-and-branch” review of the investment strategy. The actuarial valuation will provide Funds with a clear picture of where they are in their funding, and important information on the expected cashflows of the Fund.  

This is an opportune time to address the investment strategy to lead an integrated plan on funding and investment. This will drive a holistic review of the funding plan, meaning the investment strategy will reflect the current and future projected funding position of the Fund, and the contribution rates set for employers. The more muted outlook for expected returns from asset classes is something that will play an important role in discussions and determining the assumptions used by Fund Actuaries for the future service rates.

The cashflow position of Funds will also be an important output of the actuarial valuation.  As an increasing number of Funds become cashflow negative, plans will need to be devised for where these outflows will be met from. Options may include using the income generated from the investment strategy already in place, or allocating to asset classes with a higher yield and more secure stream of cashflows.

With market volatility rearing its ugly head after years of calm, it is imperative to set an investment strategy able to survive a wide range of market scenarios. This will help to ensure employer contributions can be kept stable over the long term.   

TOP FIVE CHECKLIST FOR 2019

  1. Actuarial valuation – are you prepared for any implications of the valuation, such as de-risking opportunities?

  2. Investment strategy – is your investment strategy still “fit for purpose” and reflective of your aims?

  3. Pooling – are you ready to meet key deadlines, assess opportunities as they become available through the pool, and to transition assets cheaply and efficiently?

  4. Costs – as increasing attention is given to the costs incurred by Funds, especially with cost reduction being a key aim of pooling, are you able to provide information to stakeholders regarding the efficiency of your Fund, and explain any changes?

  5. Regulatory changes – are you in a position to assess and action any amendments to regulations or guidance?

CONTACT US

JLT’s dedicated LGPS Team assist a number of LGPS Funds on the key area of investment strategy and are also currently working with both Funds and Pools advising on key issues they face with regard to pooling. To find out more please contact Iain Campbell on 0161 957 8072 or e-mail iain_campbell@jltgroup.com.