Independent report

Local Government Pension Scheme (Scotland) Section 13 report as at 31 March 2020 - executive summary

Published 24 March 2023

Executive Summary

1.1 The Government Actuary has been appointed by Scottish Ministers to report under section 13 of the Public Service Pensions Act 2013 in connection with the actuarial valuations of the funds in the Local Government Pension Scheme (Scotland) (“LGPS Scotland” 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 formal section 13 report. Section 13 was applied for the first time to the fund valuations as at 31 March 2017. We refer to this as the 2017 section 13 report. The 2017 section 13 report was published in December 2019.

1.4 This report is based on the actuarial valuations of the funds together with other data provided by the funds and their actuaries. We are grateful to all stakeholders for their assistance in preparing this report. We are committed to preparing a section 13 report that makes practical recommendations where appropriate 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 2017

1.5 We made two recommendations as part of the 2017 section 13 report. In summary we recommended that:

1. SPPA should consider how funds disclose information in a standard way.

2. SPPA should develop a basis for standardised calculations for comparative reasons only.

1.6 We are pleased to note good progress in relation to both recommendations. All funds produced standardised results on an agreed basis and a summary of the standardised information can be found in the GAD dashboard summary (see separate funding analysis report).

Overall Comments

1.7 In aggregate the funding position of the LGPS Scotland has improved since 31 March 2017; despite a sharp drop in asset values immediately prior to the 31 March 2020. The scheme appears to be in a strong financial position, specifically:

• Total assets have grown in market value from £43 billion to £46 billion

• The total value of liabilities disclosed in the 2020 local valuation reports amounted to £44 billion using prudent local assumptions

• The aggregate funding level on prudent local assumptions has improved from 102% to 104% (at 2020)

• It should be noted that assets experienced a sharp drop in value in March 2020. There had been a small recovery prior to the valuation date 31 March 2020 but we note that assets did continue to recover further after the valuation date.

• The aggregate funding level on GAD’s best estimate basis is 129% (at 2020). GAD’s best estimate basis is the set of assumptions derived by GAD without allowance for prudence. There is a 50:50 likelihood of the actual experience being better or worse than the best estimate assumption, in our opinion.

• We note that funds in LGPS Scotland, like those in LGPS England and Wales, are expected to grow over time given the profile of the funds which have a substantial number of active members. The amount of funding available to local authorities may not keep pace which and could create a risk to the local employers.

1.8 We set out below our findings on each of the four aims and our recommendations.

1.9 Under solvency and long-term cost efficiency we have designed a number of metrics and raised flags against these metrics to highlight areas where risk may be present, or further investigation is required, using a red/amber/green rating approach. Where we do not expect specific action other than a general review, we have introduced a white flag.

Compliance

1.10 Our review indicated that fund valuations were compliant with relevant regulations. Whilst most fund valuations were clear we note there are some cases where greater clarity on the assumptions used to determine contributions in the Rates and Adjustment certificate would be helpful.

Consistency

1.11 We interpret “not inconsistent” to mean that methodologies and assumptions used, in conjunction with adequate disclosure in the report, should facilitate comparison by a reader of the reports. Local circumstances may merit different assumptions. For example, financial assumptions are affected by the current and future planned investment strategy, and different financial circumstances might lead to different levels of prudence being adopted.

1.12 Further to our recommendation as part of the 2017 section 13 report, we are pleased to note all funds have calculated liabilities on a standard basis and provided consistent “dashboard” information. We consider this a useful resource to aid stakeholders’ understanding, because information is presented in a consistent way. We have consolidated this information in the GAD dashboard summary (see separate funding analysis report).

1.13 The publication of the dashboard may be more beneficial to users if the information was published as part of the valuations, rather than alongside the section 13 report. We have suggested that SPPA consider the most efficient way to publish the dashboards going forward.

1.14 We also recommend that SPPA consider the dashboard is reviewed prior to the 2023 valuation exercise to ensure it remains a relevant and useful summary. Appendix B sets out GAD’s suggestion for future dashboards.

Recommendation 1:

SPPA should consider the content and where future standardised information should be published, to enable stakeholders to access and compare funds accordingly.

1.15 The publication of the dashboard and liabilities on the SAB basis has provided a useful tool for comparison of funds. However, the SAB basis is not a substitute for the funding basis, which differs from fund to fund.

1.16 The evidential consistency on key assumptions appears to have improved since the previous valuation, which is something that GAD has welcomed. We also welcomed the publication of SPPA guidance on the allowance for McCloud remedy, which helped provide greater consistency.

1.17 Whilst we have seen improvements in this area, some inconsistency remains. GAD would encourage additional explanation on how local assumptions are derived to be included in valuation reports. Further we would recommend that SPPA continues to engage with funds to consider how emerging issues such as climate change are addressed.

Recommendation 2:

SPPA should engage with funds and other stakeholders to consider the impact of inconsistency. It should continue to consider whether a consistent approach needs to be adopted when assessing the impact of emerging issues.

Solvency

1.18 As set out on the CIPFA website in CIPFA’s Funding Strategy Statement Guidance, the employer contribution rate is appropriate if:

• the rate of employer contributions is set to target a funding level for the whole fund of 100% over an appropriate time period and using appropriate actuarial assumptions

and either:

• employers collectively have the financial capacity to increase employer contributions, should future circumstances require, in order to continue to target a funding level of 100%

or

• there is an appropriate plan in place should there be an expectation of a future reduction in the number of fund employers, or a material reduction in the capacity of fund employers to increase contributions as might be needed.

1.19 We note that funds in LGPS Scotland, like those in LGPS England and Wales, are expected to grow over time given the profile of funds which have a substantial number of active members. The growth of funds relative to the size of local authority employers creates a general risk: future volatility of the relatively larger funds could have a more profound effect on the local authority employers. This could be a risk if, for example, there was to be a severe and prolonged shock to return seeking asset classes. This represents a general increase in risk for the LGPS Scotland as a whole, so we provide a general risk comment (rather than focus on any individual funds).

1.20 We understand that Aberdeen City Council Transport Fund will merge with North East Scotland Pension Fund prior to the end of March 2023, which will be backdated to March 2022. We believe that this will mitigate the risks associated with the closed maturing fund and will be a positive development.

1.21 We have no concerns over the solvency of the funds.

1.22 In GAD’s view, whilst there was a recovery from the suppressed asset values immediately following the first COVID-19 lockdown in March 2020, future investment conditions may be volatile in the next few years. Therefore, funds will need to determine their risk appetite and consider this potential volatility carefully when making decisions on investment strategy or future contributions.

General risk comment

Funds in LGPS Scotland, like those in LGPS England and Wales, are expected to grow over time. The amount of funding available to local authorities may not keep pace. The growth of funds relative to the size of local authority employers creates a general risk, where future volatility of the relatively larger funds could have a more profound effect on the local authority employers. This could be a risk if, for example, there was to be a severe and prolonged shock to return seeking asset classes.

We would expect that administering authorities are aware of this risk in relation to solvency. We do not anticipate a specific action now but recommend administering authorities continue to monitor this risk over time. Administering authorities may wish to discuss the potential volatility of future contributions with employers in relation to overall affordability.

Long-term cost efficiency

1.23 As set out in CIPFA’s Funding Strategy Statement Guidance, we consider that the rate of employer contributions has been set at an appropriate level to ensure long-term cost efficiency if it is 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.

1.24 We have no concerns over the long-term cost efficiency of the funds. As in 2017 our analysis did not raise any flags in relation to long-term cost efficiency.

1.25 We note that the majority of funds in LGPS Scotland are in surplus. Our analysis has not raised any concerns around how such surplus is being spread.