The Government Actuary's Department’s (GAD) triennial review of Local Government Pension Scheme (LGPS) funds will focus on funds that are releasing surplus quickly, and those implementing non-standard approaches, GAD actuary, Garth Foster, has stated.

Talking about Section 13 of the Public Services Pensions Act 2013, which requires a report to be published on the health of the LGPS every three years, at the PLSA Local Authority Conference, Foster said that “in broad terms, we’re going to be looking at the funds that are releasing surplus most quickly and also looking at unique or non-standard approaches".

"We're also going to look at the scheme as an aggregate and decide and give a narrative of the overall position of surpluses and how we see that might develop," he added.

He also said that it was “key for us to be able to understand the decisions that have been made along the way”.

“What are the underlying rationales that have been used by funds to come to those decisions… we know a lot of great work goes on throughout the whole of the valuations," Foster added.

"So we really encourage funds to consider ways that they can make this information as available as possible for us and other third parties, so that it can be subject to scrutiny and ensure that we're bolstering the credibility of the scheme and the valuations as much as possible."

According to Foster, the two main principles to consider are stability and prudence.

“But then the question becomes what level of prudence should you use? But also, what does stability mean in particular context of your own scheme,” he continued.

Foster explained: “A key driver to how we think this will play out in the 2025 valuations is the gilt yields. Over the period between the 2022 and 2025 valuations that we have seen a real change.

"The world has changed over that period, and that change in the risk-free rate of return will be a consideration when actuaries are looking at setting the assumption about future investment returns for the valuation.

“And there are lots of different ways that they can do that. And it will be really important to see how stability improvements apply through that principle. And what we really see [is] the divergence in how that will play out on the 2025 valuations.”

However, “a funding level is just a funding level, and it's only meaningful to the extent that you understand how much stability and how much prudence is actually baked into that”, he added.

When considering surplus, Foster suggested looking at “what the valuation impacts are in terms of contribution rate impacts for employers. And whilst the actuarial elements of that are obviously quite important, a key driver for this is the decisions and judgements made by individual funds”.

“So that might be the surplus spreading periods that you use, deciding over what length of period you should spread your surplus. It might also be to do with stability mechanisms that you might want to use, the extent to which you might want to limit the change in contribution rate from one year to the next,” he added.

“You might also want to think about surplus buffers and the extent to which they limit the amount of surplus available to reduce contribution rates, and how you decide at what level that buffer should be set.”

Foster also emphasised how “prudence can play out in various elements of the valuation", suggesting that "the reason for that is there are adverse impacts on either side of the valuations. Nobody wants to see a return to the days of deficits in the scheme".

"But equally, there are also challenges where funds become over funded, particularly in the current context of really tight fiscal conditions," he added.

“So, really striking that balance between the two aspects [of stability and fairness] is a key to ensuring that intergenerational fairness is being achieved”.

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