Barry McKay looks at McCloud, the 95k exit cap, employer risk and investments to see what to expect for LGPS in the coming year.
On one hand, 2020 was in many ways an uneventful year—for much of it we couldn’t go anywhere, we couldn’t do very much and there were no events held. On the other hand it was very eventful and in some ways may change the way we work and lead our lives forever.
Certainly, 2020 was eventful for the LGPS, with plenty of consultations to consider, discuss and respond to. Again some of these may eventually change the LGPS and the work we do going forward.
Looking forward to the 2021 scheme year, what will we need to focus on over the next 12 months?
Actuarial, Benefits & Governance: Remedying age discrimination following McCloud
Enough of the dreadful weather puns, this will be a complex project for funds to implement and will require additional administration resources. We anticipate seeing an initial response to last year’s consultation by the end of February.
However, this consultation was fairly clear, and well received, so at least we have a clear expectation of what needs to be done. Many funds are in the process of gathering historic data and planning implementation.
In terms of funding, employers will be affected differently, depending on their membership profile, turnover of staff and salary growth expectations so funds are also starting to look at the impact of McCloud at an employer level to flag any material changes in contributions ahead of the 2022 valuation.
Actuarial: The 95K exit cap
I initially wrote this article before the latest announcement and had written: “This one is definitely not clear—of all the consultations that were issued in 2020, this is the one we expect will see changes to the current proposals”. So not a huge surprise.
Having said that, the disapplication of certain elements of the £95k cap regulations feels like a stay of execution: this will definitely return during the next scheme year.
It is difficult to predict what any new proposals will look like at this stage. If common sense prevails, you would expect the government to address the points made in the judicial reviews—and by other knowledgeable, experienced parties brought out by the consultation process—so as to avoid any future legal challenges.
It is frustrating that funds spent a lot of time, resource and money to deal with the £95k cap, only to have to potentially spend more of the same unwinding the benefits put into payment since 4 November. Whatever the new proposals, it is likely this will cause additional work for funds further down the line, and further complexities for administration staff, employers and members to understand.
Managing employer risk
The majority of funds agreed that some flexibilities, to allow them to manage employer risk, could be helpful as the number and diversity of employers participating in the LGPS continues to grow.
This should help administering authorities achieve better outcomes for the fund, by reducing risk, and the employer, through addressing affordability issues. We expect guidance on employer flexibilities in February.
Again this could lead to funds having to deal with increased workloads through contribution reviews, spreading of exit payments and putting in place deferred debt arrangements and the actuarial and legal work that goes with that.
In particular, funds will need to update their funding strategy statement and ideally have a policy on a number of issues relating to triggers and circumstances when each option applies, frequency and timing of reviews, monitoring, data requirements and costs, once the final guidance has been issued.
Investment
Typically, funds’ investment objectives have not been impacted by the events of 2020, as they don’t relate to market levels and short term volatility but instead plan for the long term.
However, current assets have been subject to change, whether it be in asset class proportions or within asset classes at sector levels. What, then, are the lessons learned that we should be applying to 2021?
- Know where you are. Yes, this is simplistic, but it is also essential. There has been a large divergence in the performance of different asset classes, and sectors e.g. the impact of the tech sector. The key to successfully capitalising on future market changes is to understanding what your current exposures are and what will drive them in future.
- Be prepared. Use this time to think about what might happen in different scenarios by carrying out some pre-mortems. What might happen and how would you react in different situations?
- Be ready. Despite the unfortunate consequences of the virus for many, consumer saving is high. Add to this record bond issuance meaning corporates also have cash available. This pent up demand bodes well for risk-on assets – a word of caution being the potential for market volatility in the short-term based around the pandemic and vaccine roll out rates.
- Inflation. The outlook for inflation now has more upside risk than it has for a while, particularly due to the higher tolerance for inflation from the US Fed an attitude that, in time, is expected to be the view of other central banks.
This is by no means an exhaustive list, although it looks long enough already; there’s plenty for administering authorities and pension committees to be getting on with.
Let’s hope 2021 is a less eventful year for the LGPS so we can at least make effective progress with these first. After all, there must be other priorities.
Barry McKay is a partner at Barnett Waddingham.
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