Technical appendices supporting the Audit Commission’s information paper Local Government Pensions in England. The appendices give more information about the modelling and assumptions used in the main report, and also cover some of the issues discussed in the main report in more detail.
Appendix A looks at the interaction of pensions with tax and benefits. The key points are that: Reducing pensions in payment, or closing the Local Government Pension Scheme (LGPS) would not deliver the savings to the public purse that some commentators expect. Most LGPS pensions are small and any savings from reducing pension benefits must be set against long term increased eligibility for state benefits. Any savings to the LGPS would appear gradually over time as a reduction in employer pension contributions.
Appendix B looks at the impact on cashflow of changing the size of the workforce. The key points are that: Reductions in the council workforce will affect the long-term financial health of pension funds. LGPS funds, like all funded schemes, are relatively insensitive to the effect of changes in the workforce size, so reducing the workforce to 2004 levels over the next five years would not seriously affect funding levels or solvency. A reduced workforce, though, causes the scheme to mature more quickly, so some funds will need to review their investment strategy and adopt safer investments with lower returns. A reduced workforce means the future financial health of LGPS funds is more dependent on investment returns. Falling membership makes it more difficult to recover funding deficits, as the contributions from active members decline relative to the size of the shortfall.
Appendix C looks at the impact of actuarial assumptions on pension scheme funding. The key points are that: Different actuarial assumptions had a significant effect on the range of funds’ liabilities and funding levels in 2007 - up to 15 per cent for some funds. There is no general pattern across the funds to suggest that the degree of prudence in the actuarial assumptions is related to the funding level. Pension funds shield employers from the full impact of low funding levels by using longer recovery periods, and other methods, to shift the deficit recovery further into the future.
Appendix D is a modelling of the 2010 funding position and its potential implications. The key points include: Pension funds have been affected by lower than expected investment returns since 2007, which have led to asset values in 2010 being on average 15 per cent lower than anticipated. The emergency budget in June 2010 announced changes to the basis for indexation of pensions in payment. This could reduce the value of pension liabilities by about 7 per cent, and improve funding levels by about 6 percentage points. It is estimated that the average (aggregate) funding level in 2010 will be 72 per cent; if the target remains at 100 per cent, funds will need to take action in response to the decline in funding.
Appendix E looks at approaches to investment risk. The key points are that: Using probabilistic methods of valuation, the outcomes of the credit crunch were not beyond the expected bounds of probability. The stronger employer covenant of LGPS funds compared with private sector schemes could be used to greater advantage to target higher investment returns but this would mean accepting increased investment risk. The focus for investment could move more towards longer term risk management and return capture, and away from a short-term focus on measured risk. Derivatives play a small but increasing role in meeting longterm objectives, and LGPS funds need to be more confident in using a wide range of financial instruments.
Appendix F looks at the impact of longevity and eligibility on pension costs. The key points are that: Pension costs have risen because pensions are paid for longer, as members live longer in retirement, and because of the admission of part-time staff. Nearly three quarters of LGPS members are women, and 45 per cent of members work part-time. The benefit structure of the LGPS was not changed when part-timers were made eligible to join, and the scheme could be redesigned to better meet the needs of the present workforce.