Key priorities for the LGPS in 2020
10 Jan 2020
Welcome to the new decade – we hope you had a Happy New Year!
The next 12 months promises to be a very busy time for LGPS funds. With Responsible Investment dominating agendas, further changes expected to the Employer Funding and Exit legislation and the SAB’s Good Governance Review continuing to gather momentum - what challenges and opportunities will 2020 bring? We take a closer look below at the key priorities for the LGPS this year.
Employer Funding and Exit legislation
The change to legislation in May 2018 to require the calculation of exit credits for exiting employers, applying retrospectively to all admission agreements, caused a number of unanticipated situations in 2019. We're expecting a further change to this legislation, to recognise a wider set of circumstances for employer participation where exit credits may not always be appropriate. We will need to keep admission agreements under review and, when the new legislation is available, ensure that the liabilities and risks for all stakeholder parties are clear during participation in the Fund and on exit. More widely, we need to make sure that employers that are close to exit are monitored closely to ensure funding risks are managed using all the tools available.
As the Government works towards a remedy for McCloud it seems likely that the greatest burden of the work will fall to administrators (see comments under the ‘Governance, Administration & Projects’ section). However, there will be a few actuarial issues to resolve too. English and Welsh funds have made allowance for possible McCloud impacts within valuations but we will need to refine these allowances when the final remedy is known. It’s likely that the impact will vary for different employers within funds. The remedy will have to be cost assessed at national level, fund level and employer level and funding plans adjusted where needed. We will also need to work closely with the accountants and auditors to ensure the emergent costs are reported as required in IAS19 and FRS102 reports.
Output from the 2019 valuations
A lot of work goes into collecting and cleansing data for the purpose of the valuation. In order to derive the greatest benefit from the effort, there are two categories of follow-up activities that aren’t always fitted into the valuation timetable. The first is ensuring that any data issues identified during the valuation are fixed at the source. This may involve employer training or the tidying up of legacy records. The second is a detailed analysis of the information coming out of the valuation about the evolution of the fund. This includes refreshed analysis of the cashflow position and projections, the demography of the Fund and how successful the valuation has been in reducing the liability risk profile of the fund across the employer base. This analysis is key to informing important decisions including the investment strategy, administration resourcing and risk management activities.
Responsible Investment matters
Expect Responsible Investment (RI) and Environmental Social and Governance (ESG) to be regular and high priority items for pension fund agendas. One of the main developments in 2019 was the publication of the FRC’S new UK Stewardship Code, coming into force 1 January 2020, which increased the best practice standard for funds as asset owners. The preparation of your Stewardship Report for March 2021, if you want to become or remain a signatory, should commence in earnest. Funds should also pair the Code with the upcoming Scheme Advisory Board (SAB) RI guidance to further develop their ESG approach. Consultation on the first part of the draft guidance closes shortly, and funds can expect more regulatory developments over the coming year.
Investment strategy and cashflow
Strong asset returns in recent years made the results of the 2019 valuation largely positive for English and Welsh Funds and a similar position seems likely for Scottish valuations due this year. However, funding improvements need to be balanced with the cost of accruing benefits given the lower growth outlook for many investment markets. To ensure your Fund’s sustainability, establishing a balance between investment risk and contributions that’s unique to your Fund’s own needs should be high on meeting agendas in 2020. This also requires an understanding of your cash flow requirements and how your investments can be structured to generate the returns you need as well as meeting net cash requirements.
There were strong reminders to all in 2019 that effective governance is key to any Fund’s success. For instance, the CMA Order that came into force on 10 December set requirements for pension schemes to establish objectives for their investment consultants. We encourage you to keep your long-term goals at the heart of your priorities and continuously reflect on whether your decisions are suitably aligned with intended outcomes. Think about what resource is required to establish adequate internal controls, evaluate risk and contributions, and most skilfully direct your investment managers and consultants towards achieving your objectives.
Governance, Administration & Projects
The SAB’s Good Governance Review continues to gather momentum and while some of the mechanics are still up for discussion the overall direction of travel is clear. The SAB is seeking to work with MHCLG to put in place a clear statutory governance framework for the LGPS. Funds will be expected to demonstrate that the way they are set up and run promotes high standard of service delivery for scheme members. Funds don’t need to wait for the details to make a start on this important work. Now is the time to consider how your Fund measures up against the proposals set out in Good Governance reports Phase I and Phase II and how you can evidence that your policies, structures and processes promote high standards of governance.
For many LGPS administration teams, the 2018/19 tax year has been the most challenging due to the ever-increasing number of tax calculations and reporting required. As more and more members become subject to an annual allowance charge, the job of identifying who is affected and carrying out the necessary work has become a major administration task. Issues such as poor data, tapering, the impact of transfers and the use of ‘voluntary scheme pays’ can all make the job more difficult. That’s why we are already working with a number of Funds to help improve processes and staff knowledge well in advance of the next round of pension savings statements.
The biggest administration challenge facing LGPS Funds in 2020 and beyond will surely be the outcome of the McCloud decision. Whatever form final redress takes, funds will need to (please take a breath…) identify affected cohorts, liaise with employers to obtain retrospective data, amend records, revisit calculations, uplift pensions in payment, communicate all of this with the affected members while ensuring throughout that the project has the appropriate level of governance. It's worth engaging early with your pension committee and board on the topic of McCloud and informing them how you will resource, manage and oversee a project of this scale, while still delivering the day job. We're on hand to help support your successful delivery of this project through our experienced Project Management and LGPS Administration support team.