2019 Valuation Seminar Summary
26 Feb 2019
Getting you valuation ready
Last week we brought together experts from our actuarial, investment and governance and benefits consulting teams to explore key areas to consider as we approach the 2019 valuation. Here are the key themes from each of the sessions:
Risk: expectation vs reality
The triennial formal valuation is an exercise in risk management to ensure there is enough money to pay members’ pensions. Throughout the valuation, you will have to make various decisions which rely on a good understanding of risk and what it means. In everyday life, there are various situations where the risks are obvious and well known. But we come across cases where our expectations don’t match reality - being far more scared of flying compared to travelling in a car. We explore similar cases in funding a LGPS fund where our expectation of risk does not match the actual reality.
100% funding is the aim: funding level is a simplistic high level measure, underneath it there is still risk associated with the past service to be managed.
Funding level drives funding strategy: the profiling (timing) of future benefit payments is what matters.
Security is more important than contributions: security does not pay benefits, in some situations cash is more important.
Central Government gets it right all the time: they don’t, we have significant uncertainty about the LGPS benefit package due to the Cost Cap and the McCloud ruling going into 2019.
Throughout the 2019 valuation, avoid common misconceptions of risk so you can secure the best outcome for members and employers.
The importance of ESG and the impact it will have on funding
Responsible investment and ESG – what potential impact could these factors have on funding? ESG factors can be financially material but investors often lose sight of the reliance that financial and economic systems have on underlying social and environmental systems. When taking into account the potential impact of environmental factors on pension funds, you should consider how attitudes to these factors can vary and how we can better understand the potential impact of systemic risks, and the opportunities they might provide.
The application of scenario testing to understand risk highlights the importance of asking the right questions to drive analysis, identify potential levers to manage risk and understand the opportunities that changes might drive. Investors might approach RI issues by considering three broad aspects: Impact, Integration and Stewardship. Using opportunities in renewable infrastructure as an example, this ties together the need to balance impact driven opportunities with evidence of investment basics - return versus risk. There are significant and prolonged changes that environmental risks could bring, but the LGPS is well placed to rise to the opportunity to both make an impact and meet funding objectives.
Planning for the valuation and beyond
The triennial valuation is clearly a vital piece of work for every LGPS fund so how can you make sure that it is a success? Like any project or significant piece of work it is important to consider the governance around the valuation and how this can help ensure the outcome you want.
The valuation doesn’t take place in a vacuum and LGPS funds face more challenges and statutory deadlines than ever before. It pays, therefore, to place the valuation in the wider context of the myriad of other things that will make a claim on your time and attention this year; annual benefit statements, savings statements, data issues, backlogs, regulation changes to name just a few. All of which is before we even start to consider the administrative challenges something like the McCloud ruling might place on the Scheme.
It’s for these reasons that a number of funds are thinking more deeply about how they can optimise their chances of consistently delivering a good service to their members and employers. There is great value for LGPS funds in spending time on a planning workshop which helps to integrate your big projects for the year with other business as usual processes. An exercise like this can help in identifying objectives, defining the different workstreams necessary to deliver them, scoping out specific requirements and agreeing priorities.
If you would like to discuss any of the topics in more detail, please don't hesitate to get in touch.