Agenda item

A report of the Director of Finance was submitted to provide Members of the Pension Fund Committee (the Committee) with an update on current issues affecting the Pension Fund locally or the Local Government Pension Scheme (LGPS) in general.

 

The issues covered in the report included:

 

• LGPS and Levelling Up.
• Government Actuary’s Department Section 13 Report – Main Findings.
• Government Actuary’s Department Section 13 Report – Fund Comparisons.
• Triennial Actuarial Valuation as at 31 March 2022.
• Department for Work and Pensions (DWP) Consultation on the Draft Pensions Dashboard Regulations 2022.
• Public Service Pensions and Judicial Offices Bill – Amendment.

 

The Head of Pensions Governance and Investment highlighted the following points:

 

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 £3.5tn.  Within that, the LGPS had total investments of over £330bn, 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 £16bn in new investment.

 

Since 2016 the Teesside 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.

 

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 supported 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.  A summary of the report’s findings was included in the submitted report.

 

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.”

 

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 highlighted as follows:

 

·        The Teesside Pension Fund had the second highest funding level in the LGPS on a local valuation basis but was only the twentieth highest on a Scheme Advisory Board standard basis.

 

·        The Fund had the sixth smallest percentage difference between the funding level it reported in its valuation report and the standard basis funding level.

 

·        The Fund had the 22nd highest pre-retirement discount rate and the 10th highest assumed asset outperformance within its discount rate. This was an assessment by GAD of the degree of investment return the Fund was assuming compared with ‘risk-free’ (government bonds) investment taking inflation into account.

 

These points indicated that the Fund might have probability of funding success that could be lower than average, and might 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.

 

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.

 

Consultation responses were required by 13 March 2022.  The Local Government Association (LGA) had prepared a response to the consultation and would share this with LGPS Funds prior to the response deadline.  The Head of Pensions Governance and Investments would consider whether a separate response was required from the Fund and, if so, would submit this after consultation with the Chair and Vice Chair of the Pension Fund Committee.

 

Public Service Pensions and Judicial Offices Bill – Amendment

 

The Government was progressing a bill through parliament: the Public Service Pensions and Judicial Offices Bill, designed primarily to remove unlawful discrimination in the protections introduced when public sector schemes were changed in 2014 and 2015.  Robert Jenrick MP,  proposed an amendment to the Bill which, supported by the government, was subsequently accepted which will add an additional unconnected provision that directly affects the LGPS.

 

The amendment changed the Public Service Pensions Act 2013 to give the Secretary of State the explicit power to issue guidance or directions to administering authorities on investment decisions which it was not proper for the scheme manager to make in light of UK foreign and defence policy.

 

It was disappointing that the amendment to this Bill allowed the Secretary of State to

gain potentially significant additional power to direct how LGPS funds could invest without allowing appropriate consultation with the LGPS itself.   Also, without sight of the guidance, it was not clear how this new power would work.  

 

Further information on this issue would be presented to the Committee as and when it became available.

 

ORDERED as follows 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.