Actuaries have pooh-poohed claims that a large drop in the Local Government Pension Scheme deficit is due to their decision to increase the discount rate by around 0.25% a year relative to gilt yields.
This week, consultancy KPMG estimated that the deficit across the whole scheme has fallen from £47bn to around £35bn.
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It said that the fact that the drop occurred during difficult market conditions highlighted the increasing reliance of the LGPS on future asset performance, putting them in a higher risk position.
Steve Simkins, pensions partner at KPMG, told Room151: “All funded defined pension benefit schemes are facing a challenge around what is a reasonable discount rate to use in the face of low long-term gilt yields.
“The consequences of using a higher discount rate is increasing the risk for employers. Rather than paying higher contributions now they are relying on their assets to perform better by a quarter of a percent a year.
“Employers are exposed to greater long-term risk. That puts an increasing focus on where the assets are invested and how they are invested. It becomes more important that they deliver that investment performance required to bridge the gap.”
But firms currently carrying out actuarial services for LGPS funds rushed to criticise the analysis.
Paul Middleman, partner and head of public sector actuarial at Mercer, said: “In our view the analysis and comment from KPMG paints a misleading picture.
“LGPS benefits increase in line with CPI inflation so an LGPS fund’s ability to generate investment returns from its assets in excess of CPI inflation forms a key part in assessing those future benefit costs.
“The majority of funding strategies adopted by our clients resulted in employer contributions either staying the same or increasing, so to say that greater risk is being taken now in funding the LGPS is both wrong and misleading.”
Barry McKay, actuary at Hymans Robertson, said: “The improved funding position of the LGPS and the reduced deficit is not a result of increasing the discount rate but instead is due to strong investment performance over the three-year period from 2013 to 2016; funds paying deficit contributions to meet their objective of being fully funded; and very favourable membership experience for the fund, in particular, a low pay growth and low inflation environment, which increases benefits less than expected.”
Graeme Muir, partner and head of public sector at Barnett Waddingham, also joined the chorus, saying: “Our discount rates are not gilt-based so lower gilt yields had no real bearing on how discount rates were set for our 25% of LGPS funds. Our discount rates reduced rather than increased.”
KPMG based its analysis on an extrapolation of figures included in LGPS funding strategy statements.
