Agenda item

Report of the City Treasurer.

4.1       Graeme Muir (Barnett Waddingham) provided the Committee with an update on progress with the 2016 triennial valuation with a presentation. He began by advising that the Local Government Pension Scheme (LGPS) Regulations stated that the triennial funding valuation was required to certify the levels of employer contributions to secure the solvency of the Fund and the long term cost efficiency of the Scheme. The triennial valuation must also have regard to the Funding Strategy Statement as determined by the administrating authority, which in this case was the Council. Graeme Muir stated that Barnett Waddingham, as the Fund’s actuary, played the role of overseeing the triennial valuation.

4.2       Graeme Muir advised that the triennial valuation took place in three steps, these being:

·         Step 1: Projection of all possible benefit payments for each scheme member

·         Step 2: Attach probabilities to each possible payment to get “expected” payments

·         Step 3: Discount “expected” payments to obtain value.

4.3       Members noted that fundamentally, the triennial valuation needed to determine how much money needed to be put into the Fund to support the projected future pension payments. Graeme Muir stated that amongst the challenges of the 2016 valuation was to take into account the new guidance from the Charted Institute of Public Finance and Accountancy, which reminded administering authorities that securing solvency and long term cost efficiency was a regulatory requirement, whereas a constant as possible contribution rate remained only a desirable outcome. Furthermore, Graeme Muir advised that administering authorities in particular needed to adhere to Section 13 of the Public Services Pension Act 2013, which requires an independent review of the valuation and contribution rates to ensure that they are appropriate and for remedial action to be taken where the review identifies any problems. Graeme Muir emphasised the need to ensure that a plan was in place and there may be some “outliers” that could be considered abnormal when compared to other Funds.

4.4       Graeme Muir advised that Funds may still have their own bespoke funding plan, however there was a need to be mindful of key performance indicators (KPIs) measures, and the Section 13 valuation. In the longer term, it was anticipated that Funds would gravitate towards the middle, with Funds being deemed “average.”

4.5       Graeme Muir then provided details of the financial assumptions of the triennial valuation. These assumptions used market indices and the Fund’s model used assumptions assessed over a six months period spanning valuation date to give stability, a method known as “smoothing”. A retail price index inflation rate of 3.3% per annum had been determined as the smoothed rate as of 31^st March 2016. Members noted that the 2013 triennial valuation assumed a rate of 0.8% per annum below the RPI, whilst the 2016 valuation proposed an increase of 0.9% below RPI. A rate of 2.4% per annum was the assumed consumer price index (CPI) as a starting point. With regard to long term salary increase assumptions, the 2016 proposal was 1.5% per annum more than CPI as of 31^st March 2016, compared to 1.5% per annum for 2013. Turning to the discount rate, Graeme Muir advised that 2.4%, 3,3% and 3.8% per annum were the smoothed rates for gilts, bonds and equities respectively as of 31^st March 2016. The prudence allowance for the discount rate was likely to be in the range of 0.5% to 1.5%.

4.6       Graeme Muir advised that the 2013 valuation had determined a whole funding basis of 74% for the Fund, with the Council’s at 70%, meaning there was a deficit of around £300 million. The 2016 indicative results had the whole funding basis of between 75% to 80%, with the Council deficit now around £300 million to £350 million. Graeme Muir stated that the key issues revolved around reducing the Council deficit and how quickly this can be undertaken and ensuring to avoid the more serious Scheme Advisory Board and Government Actuary Department “flags.” Following further funding discussions and the review of the Funding Strategy Statement, Graeme Muir advised that the triennial valuation was due to be agreed and signed off by 31^st March 2017.

4.7       George Bruce (Tri-Borough Director of Treasury and Pensions) added that modelling was being undertaken with a view to paying off the Council’s debt in 20 years and he advised that paying the debt off more quickly would save the Council money in the long term.

4.8       During Members’ discussions, it was queried whether there would be any issues in respect of the “smoothing approach.” Members also sought further explanation as to the reasons why a 3.3% per annum RPI inflation rate had been assumed, as inflation had been closed to 0% in the last year or so.

4.9.      In reply, Graeme Muir advised that as long as smoothing was not applied inconsistently, then no issues should arise from this approach. Smoothing was a common approach taken by Barnett Waddingham who also accounted for 25% of the LGPS market. In respect of the RPI inflation rate, Graeme Muir advised that the 3.3% per annum assumption was as an average rate over the next 20 years.

4.10    The Chairman thanked Graeme Muir for the update and requested a further update on the triennial valuation at the next meeting of the Committee on 15^th November 2016.

4.11    RESOLVED:

1.    That the indicative timetable for the triennial valuation process be noted; and

2.    That the verbal update provided by Barnett Waddingham be noted.