Agenda item

Report of the City Treasurer.

4.1       Graeme Muir (Barnett Waddingham) of the Fund’s Actuary, gave a presentation to Members providing an update on progress with the 2016 triennial valuation. He began by stating that the terms of the triennial funding valuation were set out in Local Government Pension Scheme (LGPS) Regulations and the principal objective was to certify the levels of employer contributions to secure the solvency of the fund and the long term cost efficiency of the scheme. The valuation should also have regard to the Fund’s Funding Strategy Statement as determined by the administering authority. Whilst undertaking the valuation, Graeme Muir advised that the actuary should have regard to the desirability of maintaining as nearly a constant contribution rate as possible.

 4.2      Graeme Muir then referred to the outcome of the previous valuation in 2013, where it had been established that the funding level was 74% and an aggregate of 16.5% deficit contributions of pensionable pay was required to eliminate the deficit over a 25 year period. In addition, 13.3% of pensionable pay was required to meet the cost of new benefits as they were earned from year to year, which put the total rate of pensionable pay at 29.8%. In order to meet the total pensionable pay rate, there had been an increase of £1.5m in deficit contributions each year, and the total deficit contribution would be £9m for 2016/17.

4.3       Graeme Muir then focused on the 2016 valuation and referred to the various challenges it faced, including the impact of needing to adhere to Section 13, which required an independent review undertaken by the Government’s Actuary Department of the valuation and contribution rates to ensure that they were appropriate and remedial action taken where problems were identified. Members noted that Funds may still have their own bespoke funding plans, but they needed to have regard to the Section 13 valuation and also to the key performance indicator measures. Graeme Muir advised Members on the 2016 valuation financial assumptions, including using market indices and yield curves using a 20 year point on curves and the model using assumptions assessed over a six month period, spanning the valuation date to give stability, a process known as ‘smoothing’. Neutral assumptions that were neither intentionally optimistic nor pessimistic were used and prudence introduced where there was uncertainty. In respect of inflation, an assumption of 3.3% had been used for he smoothed 20 year point, which after the 0.9% consumer price index (CPI) assumption was taken into account, revised the rate at 2.4%. Members noted the assumed discount rate on gilts, bonds, equities and on other assets including property and cash. Graeme Muir advised that a proposed overall discount rate of 5.1% per annum, adjusted to 2.7% when factoring in the CPI discount, was assumed for scheduled bodies within the Fund, including the Council, whilst for admitted bodies the discount rate assumed would be 1.5% after the CPI discount. Demographic assumptions had also been made, including a review of Fund mortality over 2011-2015 which had identified that life expectancies had slightly increased.

4.4       Graeme Muir advised that the initial results of the 2016 valuation indicated that the funding level had increased to 77% compared to 74% from the previous valuation and the total primary rate was 17.9% compared to 13.3% previously. In terms of comparisons with other funds, the Westminster Fund was broadly in the middle according to the standardised funding level assessment undertaken of funds. Graeme Muir advised that the next steps would involve managing contribution increases to reduce the deficit further.  He confirmed that the Westminster City Council results had now been completed and Barnett Waddingham was in the process of finalising results of other individual employers in the Fund.

4.5       During discussion, Members enquired whether the Fund would meet the expectations of the Section 13 valuation, including whether the Fund could be considered to be not inconsistent with other funds. It was noted that a smoothed dividend of 7.4% had been assumed for equity returns and it was enquired whether this was sustainable as it appeared quite high. Members pondered whether the assumed increases in life expectancy were overly high. In noting that an increasing number of schools admitted as scheduled bodies were becoming academies, views were sought on the impact this may have on the Fund. Members also asked what steps were being taken to reduce the Fund’s deficit and whether there would be further increases in contributions.

4.6       In reply to Members’ questions, Graeme Muir stated that he felt confident that the Fund would meet Section 13’s expectations, including in respect of consistency, and the smoothing technique endeavoured to make consistent assumptions. He acknowledged that mortality rate increases had slowed down in recent years. The Chairman added that there had been an appreciable increase in life expectancy for males in the last three years.

4.7       In respect of schools becoming academies, Graeme Muir stated that a significant number had made such a change, however the Government provided guarantees in the event of an academy going bust. The Scheme Advisory Board had also commissioned Pricewaterhouse Coopers to analyse funding academy arrangements.  

4.8       Steven Mair (City Treasurer) advised that a significant amount of work had been undertaken in respect of reducing the Fund’s deficit and proposals would be put forward at the Council meeting on 1^st March 2017. Peter Carpenter (Interim Tri-Borough Director of Treasury and Pensions) added that the new Funding Strategy Statement had been drafted, reflecting changes in legislation and the final version would be presented to the Committee at the 21^st March 2017 meeting.

4.9       RESOLVED:

That the draft Funding Strategy Statement attached in Appendix 2 of the report be approved, pending consultation with the employers.