The Head of Pensions Governance and Investments presented a report to provide Members of the Teesside Pension Board (the Board) with an update on current issues affecting the Pension Fund locally or the Local Government Pension Scheme (LGPS) in general.
The following issues were highlighted:
LGPS and Levelling Up
The Government published its “Levelling up the United Kingdom” White Paper on 2 February 2022. The scope of the White Paper was broad: its stated objective was to take radical steps to improve UK prosperity by “tackling the regional and local inequalities that unfairly hold back communities and to encourage private sector investment right across the UK”.
The White Paper included information about the role the Local Government Pension Scheme will be expected to play with a number of references to Local Government Pension Scheme (LGPS) Funds being used to support local investment.
There was huge potential for institutional investment to support levelling up, across infrastructure, housing, regeneration and SME finance. Institutional investors currently held UK pension assets of over £3.5 trillion. Within that, the LGPS had total investments of over £330 billion, making it the largest pension scheme in the UK. Only a tiny fraction of those funds were currently allocated to local projects. If all LGPS funds were to allocate 5% to local investing, this would unlock £16 billion in new investment.
The detail of the White Paper’s aims in respect of LGPS investment in local areas was expected to be included in a forthcoming consultation document expected later in the year. There were however some significant issues that needed clarifying which were outlined in the submitted report.
Since 2016 the Pension Fund had put in place a protocol to enable local investment opportunities to be considered and, where suitable, approved by the Pension Fund Committee. The Fund defined “local” within the context of its own geographical area, so local investments in this context were those within the Teesside area (the areas covered by Hartlepool, Middlesbrough, Redcar & Cleveland and Stockton-on-Tees Councils).
The Fund’s investment approach allowed up to 5% of its assets to be invested in local projects. One of the important criteria for assessing any potential local investment was to ensure it had the right risk and return characteristics to meet the Fund’s financial objectives. Any local investment in itself needed to generate an acceptable economic return for the Fund. The Fund could not factor into its calculations, secondary benefits, such as social or any other non-economic benefits that did not provide direct investment return. Having an appropriate governance structure around the investment was also very important, as was the need for the Fund to acquire and act on appropriate specialist advice as required when deciding whether to progress with a local investment.
Over the last six years the Fund had made a total of £41m in commitments to the following three ongoing local investments with different risk/return profiles: GB Bank, The Ethical Housing Company and WasteKnot. This commitment represented around 0.8% of the Fund’s assets (based on the Fund’s 31 December 2021 valuation). This was some way short of the 5% potential local investment allocation, and reflected in part the difficulty of sourcing appropriate local investments for the Fund within the Teesside area.
A consultation document was expected later in the year which should provide more clarity on the government’s ambition for LGPS Funds to invest 5% of their assets in projects that support local areas, and on whether this would be implemented through statutory guidance or legislation.
Government Actuary’s Department Section 13 Report – Main Findings
On 16 December 2021 the Government Actuary’s Department (GAD) published its Section 13 Report on the actuarial valuations carried out across the LGPS as at 31 March 2019. The Report was named after Section 13 of the Public Service Pensions Act 2013 which required the government to commission a report after each triennial valuation to assess whether the following four aims had been achieved: compliance, consistency, solvency and long term cost efficiency.
The Report was broadly positive about the LGPS and acknowledged that since the 31 March 2016 valuation, market value of the scheme’s assets increased from £217 billion to £291 billion and its aggregate funding position on prudent local bases had increased from 85% to 98%.
GAD added a note of caution about potential funding issues in the future: ”the size of funds has grown significantly over the three years to 31 March 2019. However, the ability of tax backed employers to increase contributions if this was to be required (as measured by their core spending power) has not kept pace. This could be a risk if, for example, there was to be a severe shock to return seeking asset classes.”
As regards the four aims, a summary of the report’s findings was included in the submitted report.
Government Actuary’s Department Section 13 Report – Fund Comparisons
In producing the Report, GAD compared each LGPS Fund’s 31 March 2019 valuation on a single standard basis which was typically less prudent than the Fund’s own basis but allowed better comparison between Funds.
An extract from the Report’s appendix including several relevant graphs was attached at Appendix A to the submitted report.
The main points to note from the comparison graphs were as follows:
These points indicated that the Fund may have probability of funding success that could be lower than average, and may also be anticipating a higher return from its assets than the average LGPS Fund. However this needed to be considered in the context of the Fund’s asset mix which, at the last valuation, was significantly more heavily weighted towards equities than the average LGPS Fund.
By its nature, GAD’s Report was primarily backward looking, although the recommendations would be considered and taken into account, where relevant, by the Fund’s actuary as the 31 March 2022 valuation was undertaken.
Triennial Actuarial Valuation as at 31 March 2022
2022 was a valuation year for the LGPS. Every three years the Fund’s assets and liabilities were valued as at the 31 March by the Fund actuary, with the resulting report (expected to be published in final form in March 2023) showing the Fund’s funding level and setting employer contribution rates for the next three years from 1 April 2023 onwards.
The Fund, in common with the rest of the LGPS, was a long term investor, whose pension liabilities were largely backed by secure employers with very strong covenants. This meant the actuary was able to take a long term view when setting the financial and demographic assumptions for the valuation. However shorter term volatility in asset values had to be recognised as part of the valuation process, and the starting point for the valuation would be the actual market value of the Fund’s assets on the valuation effective date (31 March 2022).
The Fund had recently appointed Hymans Robertson as its actuary from 1 January 2022 and had been working with Pension Fund officers and with XPS to ensure there would be a smooth exchange of data required for the valuation, and to finalise a valuation timetable. The new Fund actuary was expected to be providing further information on the pending valuation to the 16 March 2022 Pension Fund Committee, including a short training session on valuations, which Board Members would be able to attend.
Department for Work and Pensions (DWP) Consultation on the Draft Pensions Dashboards Regulations 2022
On 31 January 2022 the DWP published a consultation document on draft regulations designed to implement pensions dashboards. Pensions dashboards would be an internet-based service which allowed individuals to access information about their pensions, ideally from all sources (private sector, public sector and state pension) all in one place. The intention was that pensions dashboards would put individuals in control of planning for their retirement by bringing together their pensions information from multiple sources, including information on their State Pension, which could be accessed at a time of their choosing.
The consultation and the draft regulations set out what steps pension schemes and dashboards would be required to take, and proposed introducing the obligation to connect with, and supply data to, the dashboards systems. This was expected to happen in a staged way starting from April 2023. Public service pension schemes (including the LGPS) would be compelled to connect no earlier than October 2023.
The consultation set out details of the type and format of data pension schemes and dashboard that providers would be required to use to validate and process requests from scheme members, along with the potential penalties for those organisations who did not comply.
The type of information the LGPS would initially be expected to provide on a pensions dashboard was similar to that already provided through annual benefit statements. However the introduction of pensions dashboards might increase interaction with scheme members, as well as putting even greater emphasis on the importance of data quality and timely processing.
Consultation responses were required by 13 March 2022. The Local Government Association (LGA) has said it will prepare a response to the consultation and will share this with LGPS Funds prior to the response deadline. The Head of Pensions Governance and Investments would consider whether a separate response is required from the Fund and, if so, will submit this after consultation with the Chair and Vice Chair of the Pension Fund Committee.
AGREED that the:
1. information provided was received and noted.
2. Head of Pensions Governance and Investments would submit a response to the Draft Pensions Dashboards Regulations 2022 consultation, if required, in consultation with the Chair and Vice Chair of the Pension Fund Committee.