Funding issues due to COVID-19 have arisen due to the day-to-day volatility in asset prices and weakening of some employers' financial strength. Our recommendations to LGPS funds for managing these issues are to:
Avoid knee jerk changes to long term funding strategies – everything we’ve currently seen is due to short term concerns, nobody knows what the longer-term impact may be
Focus on where the funding position will be crystallised (cessations & bulk transfers) in the next 3-6 months – liaise with any affected employers and discuss options with your actuary
Review the covenant strength for certain employers or sectors – this should give you a good idea of where any affordability issues may arise over the coming days, weeks and months
Formulate a policy for considering requests to defer contributions – will you offer this to any employers? If so, what is the criteria and governance?
The best course of action would be to contact your actuary to discuss these areas further and work through the COVID-19 funding checklist we issued last week.
Investment considerations
The market impact of COVID 19 on LGPS investments continues to be volatile and the extent and duration of the impact uncertain. While LGPS funds can still take a longer term view there are some shorter term areas to consider: liquidity and cash requirements (how has projected cash coming in and going out been impacted), collateralisation and settlement of any derivative positions including FX, when and how to consider rebalancing, specific manager issues (when is a deep dive required) and whether any recent strategic decisions need to be reassessed. This list is not exhaustive but your client team will be well placed to ensure you are kept up to date on developments and ready to act if needed.
Keeping the LGPS connected
In these uncertain times, keeping in touch with your peers is more important than ever, for instance how to make sure your Fund is in good shape with the above challenges. In the absence of any LGPS conferences for the foreseeable future, we’ve launched a fortnightly series of short webinars to help keep you up-to-date on what’s going on around the country. The series kicked off on 27th March and had over 100 attendees; the next is taking place on 9th April: please register here and join in the discussion with LGPS officers, live polling, and audience questions.
Changes to rules around local authority meetings
The passing of the Coronavirus Act 2020 contained a clause which allows the Secretary of State (Welsh Ministers in Wales) to bring in new regulation regarding the proceedings of local authority meetings. This change is necessary because The Local Government Act 1972 previously required elected members to be physically present at full council or committee meetings (there was a bit more flexibility in Wales where video conferencing was permitted provided 30% of members were present). Our understanding is that the necessary regulations will be issued shortly.
Furloughed employees
The Government Coronavirus Job Retention scheme allows employers who are forced to put staff on leave of absence during the pandemic to keep paying them and reclaim from Government 80% of their wages up to a maximum of £2,500 per month, NI contributions and pension contributions up to the minimum automatic enrolment limit of 3%. Furloughed employees are not allowed to carry out work during the furlough period. The Government does not expect that many public sector employers will use the scheme since many are continuing to provide essential services and their wages are paid for out of public money in the first place, however most funds will contain some employers who are eligible to use the scheme. LGA have issued a useful FAQ for Scheme members on this and other Coronavirus related issued which can be found here.
Will the pandemic help to tackle climate change?
We are all facing unprecedented times, and changes to the way we work, rest and play. It’s difficult to see past the challenges that are right in front of us, but there are signs of hope for the future. Callum Stewart’s blog considers what we can learn from the current restrictions when it comes to the long-term changes we all need to make to tackle climate change. The lessons from previous economic shocks are sadly not very encouraging.
Business continuity at Hymans
In line with Government advice, all of our staff are working remotely with no face-to-face communication with other colleagues or clients. Our Business Continuity Plan includes a substantial resiliency in our IT systems which can be managed remotely, and we have a dedicated Crisis Management Team who are meeting regularly and oversee the delivery of the plan. We are pleased to say that we can continue to provide all of our usual services and are happy to offer you the facility to conduct meetings online, or by teleconference. We will also continue to adhere to a strong team ethos; in the unfortunate event that some of our staff become ill, other members of our staff will be pleased to continue to provide support to your Fund.
Changes to year end accounting disclosures
A CIPFA press release on 27 March set out that they are urgently working on producing a simplified version of the 2019/20 Accounting Code of Practice to ease the burden on practitioners in these difficult times. This will allow the production of a ‘radically reduced’ set of financial statements. The exact timetable for the above is unknown but outcomes could be expected from around the 10th April. Whatever the outcome, we assume that some form of pensions accounting balance sheet will remain as a minimum requirement and that the most cost effective way to approach this is to simply continue producing our standard IAS19 disclosures, allowing authorities to pick out any figures they need if the pension reporting requirements are reduced a little.
LGPS National Knowledge Assessment
The LGPS National Knowledge assessment has entered its 2nd week and already we have had many completed returns from Committee and Pension Board members. We have been very pleased by the number of funds taking part and those that have shown interest in making this online knowledge assessment ‘live’ for their Committee and Board members at this time. For those that haven’t yet decided, there is still time for your fund to take part in this unique assessment. Please contact Andrew McKerns to discuss.
Statistically significant
Alongside the budget on 11 March, the government published a consultation on reforms to the Retail Price Index (RPI) methodology. The consultation followed proposals in 2019 by the UK Statistics Authority. We summarise some of the key points and proposals set out in the consultation in our 60 second summary and would encourage authorities to respond to the consultation given the potentially significant financial impact of these proposals for the LGPS.
All change with the annual allowance
Given events of recent days the changes to the annual allowance (AA) announced in the recent Budget seem a lifetime away. In response to concerns that the AA was having significant impact on some public sector employees, most notably in the NHS, from the 2020/21 pension input period the Chancellor has increased each of the tapered AA thresholds, with threshold income being raised to £200,000 and adjusted income to £240,000, although anyone who is affected by the taper will only be allowed to accrue £4,000 of pension growth before paying tax on their excess.
Although we see examples of individuals who have adjusted income over £240,000, for someone to have threshold income over £200,000 they would have to be earning a gross salary in excess of £228,000. So unless an individual has another source of income as well as a significant salary with a local authority it is unlikely that tapering will be an ongoing issue for the LGPS.
Progress on McCloud
Lord Agnew made a ministerial statement on 25 March about progress towards a remedy across public service pension schemes on the McCloud/Sargeant age discrimination ruling. From a LGPS perspective, there was nothing particularly newsworthy in the update; our understanding is that the proposed LGPS remedy will consist of an automatic extension of the final salary underpin (that had been available only to members with ‘transitional protections’ under the 2014 reforms) to all eligible members regardless of age. It remains unclear how this remedy will affect the ‘paused’ cost control mechanism. The statement mentions that detailed proposals will be published later this year and will be subject to public consultation.
Good Governance
The SAB working group on Good Governance is continuing to meet remotely in order to take forward phase 3 of the project.
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