The Local Government Pension Scheme (LGPS) community has panned proposals for a four-year valuation cycle, with many questioning the government’s assumption it would reduce costs.
This week saw the closing of a Ministry for Housing, Communities and Local Government consultation on extending the valuation cycle to bring local valuations in line with the four-yearly government valuation of the LGPS.
In the consultation document, the government said moving from the current three-year cycle would deliver greater stability in employer contribution rates and reduce costs for administering authorities.
However, a number of responses to the consultation have queried this assumption.
A submission by LGPS pool Local Pensions Partnership (LPP) said: “LPP contends that it may not necessarily be the case that this proposed change will result in either greater stability of contribution rates or reduced costs for employers.
“Less frequent monitoring of contributions and costs may result in a reduction in both contribution stability and levels of governance, with less flexibility to adjust to changes in circumstances and a greater step change at each quadrennial valuation date than would otherwise have been the case.”
It said that a gap of four years between valuations could lead to additional risk due to a delay in changing contribution rates due to covenant risk issues.
LPP added that, in any case, the cost implications “will need to be balanced with the corresponding increased potential for greater step change in employer contributions and the potential for reduced contribution stability if these are only reviewed every four rather than every three years”.
In its response to the consultation, pension adviser Hymans Robertson said: “It is difficult to be certain that moving to a four-yearly cycle will save costs.
“This will largely depend on the balance of savings made due to a one-year increase to the cycle (saving one valuation cost over 12 years) versus the cost of carrying out interim valuations and any other additional employer work required as a result.”
The response said that any cost saving analysis should consider the “more substantive” possible costs of delayed valuations as well as costs of carrying out valuations plus interim valuations.
Hymans added that a four-year cycle is longer than the standard three-year cycle applied to funded private sector schemes.
“The proposal introduces inconsistency in policy on valuation cycles across pension schemes in the public and private sectors without any clear rationale.”
A response by Torfaen County Borough Council said: “It is not clear how costs will be saved as the reduced frequency of paying full valuation fees to the actuary will likely be offset by increased interim monitoring that will be essential to the longer valuation periods.”
A number of respondents argued that there are good reasons that the LGPS should not be forced to match the same four-year cycle applying to other public service schemes.
London Borough of Croydon said: “The other main public service schemes are unfunded.
“They operate on a pay-as-you-go basis, which means there is no fund of assets which is invested and from which pension benefits are paid.”
It added: “There are, as a result, good reasons why a funded scheme should have a shorter valuation cycle than an unfunded scheme such as to allow better management of risks relating to market volatility or changes to employer circumstances.”
In June, Barry Mckay, partner and actuary at pensions consultancy Barnett Waddingham examined the government’s proposals for Room151.
He said: “A fund will save one valuation fee every 12 years! And this saving assumes no interim valuations are needed!”
