On 20 February we held a seminar for Scottish LGPS funds, considering some of the ‘big picture’ issues that will affect the upcoming valuations. The four sessions were wide-ranging in terms of geography (from Scotland to California), history (from the 1970s to 2020) and subject matter (from governance to investment strategy).

LGPS Scotland: the best pension scheme in the world?

Laura McInroy opened proceedings with a competition pitting the LGPS in Scotland against four other large public sector defined benefit schemes from across the world. The Scottish LGPS has an enviably strong funding position compared to the rest, but being well-funded isn’t everything, and it doesn’t affect the cost of new benefits which are very generous in the LGPS. In fact, for many members the new CARE scheme is more generous than the 2009 final salary scheme, and the “cost cap” mechanism introduced as part of the 2015 reforms is not as effective at controlling costs for employers as it sounds. LGPS Scotland is in a very strong position and 2020 funding levels are likely to be healthy, but given the high cost of benefits and uncertainty around the future, there are reasons to be cautious about translating this straight to a reduction in contributions.

There was some discussion among the attendees around what high funding levels would mean for the 2020 valuations: some were concerned that it would increase pressure to reduce contributions, but others felt there were sufficient headwinds (McCloud, cost cap, etc) that stakeholders would understand the need for caution.

Protecting improved funding levels

David Walker continued with a look at what strong funding positions mean for Scottish funds, and how investment strategy can be used to safeguard them. ‘Traditional’ protection assets – index-linked gilts –are relatively unattractive at the moment but there are several alternatives. A common theme in 2020 will be “diversification as the new de-risking” focussing on promising income-focussed assets like infrastructure, which align well with the goal of generating diversified, real returns. However, investors will need to be selective given the weight of money chasing these opportunities. 

As with any investment strategy decision, the first step is to think carefully about objectives. Protecting a high funding level is tempting but to keep contributions affordable the investment strategy will also need to include the right proportion of return seeking growth assets.

England and Wales Good Governance project: relevant to Scotland?

Ian Colvin posed the question of how relevant the England & Wales Scheme Advisory Board’s Good Governance project is to the LGPS in Scotland. Many of the reasons for the review apply equally to Scotland, not least the thorny issues of conflict between administering authority and local authority, and adequate staffing levels. Many of the project’s recommendations so far would also be applicable to Scottish funds for the same underlying reasons.

One of the main issues raised by the project has been committee member knowledge and understanding, and we are launching our National Knowledge Assessment on 17 March to help all LGPS funds understand their Elected Members’ knowledge levels and help develop training plans.

The LGPS in Scotland: plus ça change?

Ronnie Bowie, former senior partner at Hymans, looked back on his long career and considered what has influenced the current state of the Scottish LGPS and what could affect its future. In many ways the scheme is unrecognisable from the 1970s and 80s, not just in size but also complexity and sophistication. The 1980 valuation data arrived in a locked chest and was processed with punch cards on a mainframe, a far cry from today’s self-service technology! Three major events have left their mark on the Scottish LGPS since then:

• Using the large surplus built up in the 80s to bring the cost of pension increases into the fund, rather than recharging them to employers each year
• Resisting the temptation of contribution holidays after the introduction of the poll tax and the 75% funding target in England and Wales
• Developing techniques like stabilisation to cut through short-term noise and keep contributions steady

Despite everything, the fundamentals of the LGPS in Scotland remain as they were, and many of the assumptions and even contribution rates have not changed as much as they appear at first glance.  Ronnie was reluctant to make predictions for the future, pointing out that in 1980 he would never have anticipated the changes mentioned above. However, LGPS Scotland is in a very strong position, and provided funds and actuaries continue to take a long term view it is well-equipped to weather all the uncertainty it currently faces.

If you would like to discuss any of the topics in more detail, please don't hesitate to get in touch.

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