Independent report

Local Government Pension Scheme (Northern Ireland) Section 13 report as at 31 March 2019 - executive summary

Published 26 April 2022

Executive Summary

1.1 The Government Actuary has been appointed by the Department for Communities (DfC) to report under section 13 of the Public Service Pensions Act (Northern Ireland) 2014 in connection with the actuarial valuations of the Local Government Pension Scheme Northern Ireland (“LGPS NI” or “the scheme”).

1.2 Section 13 requires the Government Actuary to report on whether the following aims are achieved:

• Compliance
• Consistency
• Solvency
• Long term cost efficiency

1.3 This is the second section 13 report for LGPS NI. Section 13 was applied for the first time to the scheme valuation as at 31 March 2016. We refer to this as the 2016 section 13 report. The 2016 section 13 report was published in March 2019.

1.4 This report is based on the actuarial valuation of the Northern Ireland Local Government Officers’ Pension Fund (“the fund” or “LGPS NI pension fund”), other data provided by Northern Ireland Local Government Officers’ Superannuation Committee (NILGOSC) and its actuary, Aon. We are grateful to these stakeholders for their assistance in preparing this report. We are committed to preparing a section 13 report that makes practical recommendations to advance the aims listed above. We will continue to work with stakeholders to advance these aims and expect that our approach to section 13 will continue to evolve to reflect ever changing circumstances and feedback received.

Progress since 2016

1.5 As part of the 2016 section 13 report, we concluded that the 2016 actuarial valuation of the LGPS NI and the resulting employer contribution rates achieved the aims set out in section 13 in respect of compliance, consistency, solvency and long-term cost efficiency. No recommendations were made in the 2016 section 13 report.

1.6 We are pleased to note that the LGPS NI continues in good health.

Overall comments

1.7 The funding position of the LGPS NI has improved since 31 March 2016 and the scheme appears to be in a strong financial position, specifically:

• Total assets have grown in market value from £5.8 bn to £8.0 bn
• Total liabilities disclosed in the 2019 local valuation report amounted to £7.2 bn. The local valuation is required to be completed using prudent assumptions
• The aggregate funding level on the prudent local basis has improved from 96% to 112% (at 2019)
• The improved funding level is due in large part to strong asset returns over the 3-year period to 31 March 2019. The funding level also improved due to change in the demographic assumptions, but this was offset by changes in financial assumptions
• The funding level on GAD’s best estimate basis has reduced from 122% (at 2016) to 114% (at 2019). This reflects a lower expected asset return following a change in asset strategy and a change to the assumptions adopted. GAD’s best estimate basis is the set of assumptions derived by GAD without allowance for prudence. In our view, there is a 50:50 likelihood of the actual experience being better or worse than the best estimate assumption
• We note that the size of the scheme has grown significantly over the 3 years to 31 March 2019. The ability of tax backed employers to increase contributions if this were required (as measured by the local authorities revenue funding) may not always keep pace with this growth. This could become a risk if, for example, there were a severe shock to return seeking asset classes

1.8 The following paragraphs provide further details on compliance, consistency, solvency and long-term cost efficiency, including some suggestions that DfC and NILGOSC may wish to note.

Compliance

1.9 Our review indicated that the LGPS NI valuation was compliant with relevant regulations on the basis described in Chapter 3 of this report.

Consistency

1.10 As there is only one fund in LGPS NI, there are no other actuarial valuations in respect of the fund to compare with.

1.11 The LGPS NI pension fund has included the standard dashboard agreed by funds in England and Wales, which makes comparison between the fund and LGPS England and Wales funds easier. NILGOSC may wish to consider whether to adopt a consistent approach with the emerging risks outlined in the LGPS England and Wales section 13 and proposed changes to the standard dashboard.

1.12 The 2016 and 2019 reports were compared for presentation and evidential consistency with regarding to information on: discount rate, contribution rate, deficit contributions and recovery plan. GAD did not observe any presentational or evidential inconsistency.

Solvency

1.13 The solvency requirement is that employer contributions should be set at such a level as to ensure that the scheme’s liabilities can be met as they arise.

1.14 In our view, the LGPS NI pension fund meets the conditions required to be able to demonstrate solvency. The fund is in a strong financial position and the funding level compares well with the LGPS England and Wales funds. However there are risks that remain which NILGOSC should consider.

1.15 Our engagement with NILGOSC gave us reassurance that the fund is aware of the risks we have identified in this report and has processes in place to manage and mitigate them. The risks identified include those that follow.

High proportion of non-statutory employers

1.16 LGPS NI has a high proportion of non-statutory employers (e.g. Housing Associations, Universities, Colleges, Schools). If such employers exit the fund and it is not possible to obtain all or part of the exit payment due from them, costs fall back on the other fund employers.

1.17 NILGOSC actively manage this risk by:

• setting different funding targets for different employers depending on their deemed security and likelihood of exit from the fund
• carrying out triennial assessments of employer covenant and changing employer contribution rates where necessary
• monitoring the exit payment that would be due from each employer (if they were to have exited on the valuation date) and recognising those employers whose liabilities would become orphan on exit

Volatility and sourcing of employer contribution

1.18 Solvency is dependent on employers being able to pay contributions as required, knowing that these contributions may increase or decrease significantly in future. Changes to the value of scheme assets may place upward or downward pressure on employer contribution rates. NILGOSC actively manage this risk by periodically reviewing its strategic funding target and its target asset allocation. The current strategy is to invest around 55% of the fund’s assets in return seeking assets (a decrease from 86% in 2016). This would be expected to reduce the investment risk and hence volatility of employer contributions in the future.

1.19 Over the 3 years to 31 March 2019, the fund’s assets have grown by 38% and liabilities by 18%. The size of the local authorities’ revenue funding has grown at a slower pace (around 10%). We note a large proportion of employees within the fund are employed by the education authority, but we do not have detailed information on the growth of funding for NI education authorities. However, we have no reason to expect a significantly higher trend to that which has been observed with the majority of government departments in Northern Ireland. This increases the risk to the scheme if, for example, there was to be a sustained reduction in the value of return seeking assets. This represents a general increase in risk for the scheme, so we provide a general risk comment, which was also included in the LGPS England and Wales section 13.

1.20 The following general risk comment highlights the ongoing risk that pension funding presents to local authorities. We are not suggesting NILGOSC and their advisors are unaware of this risk, but we have illustrated possible implications in the asset liability modelling which we undertook for the LGPS England and Wales section 13.

General risk comment

Local authorities have finite resources and in recent years the size of pension funds has increased considerably more than local authority budgets. Given that pension funding levels change it is not unlikely that a period of increased pension contributions may be required at some point in the future.

If additional spending is required for pension contributions this may lead to a strain on local authority budgets.

We would expect that administering authorities and pension scheme committees are aware of this risk in relation to solvency and would monitor it over time. Administering authorities and pension scheme committees may wish to discuss the potential volatility of future contributions with employers in relation to overall affordability.

1.21 Risk from changes to the value of scheme assets and the scheme funding level remains. NILGOSC might want to consider if the remaining risk on employer contribution volatility risk is appropriately communicated to stakeholders, including employers.

Long-term cost efficiency

1.22 The rate of employer contributions should be sufficient to make provision for the cost of current benefit accrual, with an appropriate adjustment to that rate for any surplus or deficit in the fund.

1.23 In our view, the LGPS NI pension fund meets the conditions required to be able to demonstrate long-term cost efficiency of the scheme. We note that it compares favourably against the majority of funds in England and Wales where we consider the SAB funding level together with the total employer contribution rate.

1.24 The surplus retention measure is white flagged (highlighting a general issue but one which does not require an action in isolation). Other measures including deficit reconciliation were flagged green.

Surplus Retention

1.25 At the 2019 valuation, while the future service rate has increased, the total employer contribution rate has decreased as part of a strategy to gradually eliminate the surplus that has arisen in the fund. This measure highlights a general issue that the resulting contribution rate is below our best estimate future service contribution rate. As we do not believe this requires action in isolation this has been white flagged.

Deficit Reconciliation

1.26 On a best estimate basis the fund is in surplus; therefore it has a green flag on the deficit period measure. We note that the maximum deficit recovery end point has been maintained at 2037 for those employers still in deficit at the 2019 valuation and not on a flight path for closure of active participation. Where employers are on a flight path to closure the deficit recovery end point is aligned to the future expected working life of active members.

1.27 If at a future valuation employers remain in deficit and it was possible for the employer contributions to be reduced, we would expect that NILGOSC would again either maintain the deficit recovery end point or move it forwards, and not move it backwards.