Agenda item

A report of the Director of Finance was presented to the Board on items scheduled in the work plan for consideration at the current meeting.

 

Cost Control Consultation

 

The benefit structure of the Local Government Pension Scheme (LGPS) was last radically reformed in 2014, taking it from a scheme providing a pension of 1/60th of final salary to one that (going forward) provided a pension of 1/49th of career average pay.  When these changes were introduced the Government put in place two ‘cost control’ mechanisms designed to ensure the cost of providing the scheme benefits remained within a specific range.  One was scheme-specific and was run by the LGPS Scheme Advisory Board (SAB), the other was applied by HM Treasury, which applied a cost control mechanism across all public service pension schemes.  The concept behind cost control was that if the scheme looked to be significantly cheaper than expected in the long run the benefits could potentially be increased and/or member contributions reduced.  Conversely if the scheme looked to be significantly more expensive than expected in the long run, future benefits would potentially be reduced and/or member contributions increased.

 

To date the mechanism had produced some potentially surprising outcomes – assessments were carried out every four years, with the first undertaken as at 31 March 2016.  This showed that the cost of the scheme was below target, mainly because of a reduction in assumed future pay increases and a reduction in assumed life expectancy.  This would have led to an increase in scheme member benefits and/or a reduction in scheme member  contributions if the whole process had not been put on hold while the outcome of the legal challenge in relation to the McCloud case was resolved.  This case resulted in the Government making a commitment to extend the protections put in place when the new LGPS was introduced to cover scheme members of all ages, not just older scheme members as that original approach was deemed to be unlawful discrimination. As the Government determined that the cost of correcting this discrimination should be a ‘scheme member cost’ the final assessment of the cost of the scheme under the cost control mechanism was that it fell within appropriate parameters and the scheme benefits should not be changed.

 

The Government was facing a legal challenge from trade unions in relation to deciding the cost of remedying the discrimination should be a scheme member cost.  The outcome of the court case was not yet known and, should it be appealed to the Supreme Court, may not be finalised until towards the end of this year.

 

In the meantime the Government had issued a consultation on changes to the cost management process with the intention of better aligning the two cost control mechanisms that applied to the LGPS by updating the SAB mechanism to align with the HM Treasury cost control valuations and give the SAB more flexibility in how it managed any cost variations.   A copy of the consultation document was enclosed at Appendix A to the submitted report.

 

The Fund’s Actuary, had stated that it will respond to the consultation and share its response with administering authorities.  Given the technical nature of this subject matter it was appropriate for the Fund to take the Actuary’s comments into account before deciding whether to produce a response. The closing date for the consultation was 24 March 2023.    Any Board member who wished to comment could contact the Head of Pensions Governance and Investments.

 

 

 

 

Change to Revaluation Date Consultation

 

When the LGPS moved to a career average scheme in 2014, under the regulations governing the scheme, the pension an individual earned was revalued on 1 April every year in line with the annual Consumer Prices Index (CPI) as at the previous September.   The tax year ran from 6 April to 5 April and it was the growth in the value of an individual’s pension benefits over this period that was measured against the ‘annual allowance’ (currently set at £40,000) – if an individual exceeded this annual allowance they were potentially liable to a tax charge on the excess.

 

In order to allow for individuals’ benefits increasing in line with inflation, this was taken into account when calculating whether someone had exceeded the annual allowance.  Unfortunately, the slight difference between revaluation date in the LGPS (the 1 April) and the start of the tax year (the 6 April) led to a mismatch and an earlier year was used when determining the increase in benefits that was permitted without incurring a tax charge. This year, owing to an increase in CPI from 3.1% in September 2021 to 10.1% in September 2022, that mismatch was significant and meant many more individuals in the LGPS would be subject to an annual allowance charge as the allowance for inflation for determining whether they would exceed the annual allowance would be 3.1%, but their career average LGPS benefits would increase by 10.1%.

 

The Government was proposing to correct this by moving the revaluation date in the LGPS to 6 April each year (bringing it in line with the tax year) and making other consequential amendments to ensure nobody was disadvantaged by this proposed change.  This should ensure the number of peopled impacted by the annual allowance charge was more in line with that for a normal year, and should also prevent this issue arising in future.

 

A copy of the consultation document was attached at Appendix B to the submitted report. There was a tight timescale for this consultation, as administration and software changes would be required to implement it before the April revaluation.  The consultation was issued on 10 February with responses due by 24 February.  It was proposed that the Head of Pensions Governance and Investments would discuss the practicalities of this proposed change with XPS Administration and issue a response to the consultation.

 

Investment Pooling – Potential Withdrawal of a London Borough

 

The Royal Borough of Kensington and Chelsea (RBKC), which was nominally part of the London CIV pool, was considering formally withdrawing from the London CIV.  This was significant as it would represent the first time an LGPS administering authority had withdrawn from an investment pool and as such was a potential challenge to the Government’s pooling agenda.

 

At the time of writing the report it was not clear whether RBKC would vote to leave the London CIV.  It should be noted that although the fund had around £1.5 billion in assets it appeared none was invested in any of the London CIV’s funds, instead it invested its equities through passive vehicles and its other assets via other managers.  Nevertheless, RBCK had been paying a governance charge for membership of the London CIV.

 

Should a decision be taken to leave, the response from the Government would be closely watched.  It could be argued however, that RBCK had not been meaningfully participating in pooling for the last three years and no Government action had been forthcoming.

 

Future Consultations

 

A number of consultations in relation to the LGPS were expected from the Government in the coming months – several had been awaited for some time.  The current list included the following:

 

•           McCloud Regulations.

•           Goodwin Regulations.

•           Pooling Guidance.

•           Good Governance.

•           Anti-Boycotts, Divestments and Sanctions.

 

AGREED as follows:

1.         That the report was received and noted.

2.         The Head of Pensions Governance and Investments would issue a response        to the consultation on the proposed change to revaluation date on behalf of     the Fund.