CLG (10) PRG 44
LOCAL GOVERNMENT PENSION SCHEME
POLICY REVIEW GROUP
Cap and Share 2010 Model Fund – Assumptions and
Methodology
Background
1.
For the 5th October 2009 PRG meeting a draft copy of proposed
Statutory Guidance on assumptions and methodology to be adopted for the
Cap and Share 2010 Model Fund was presented (attached at Annex A). The
paper in effect summarized the earlier and ongoing discussions on the factors
to be included in the model fund and was linked to the assumptions previously
used in the “dry run” modeling exercise carried out in 2008. A copy of the
GAD report from that particular exercise was issued in December 2008 as
part of the consultation leading to the introduction of SI 2009/1025. At the
meeting CLG and GAD responded to members’ queries on the draft paper
and also invited members to write to CLG for any further questions.
2.
This first national Fund, valuation which the group has been using as
an effective baseline both in terms of establishing current costs and against
which future changes will be measured. As part of the valuation exercise,
GAD also highlighted some sensitivity variations and the impact on the cost of
scheme of slightly varying individual assumptions (see paragraph 6 of the
“Dummy Model Fund” report). The general assumptions used were the
average of assumptions used by actuaries as part of their individual fund
valuations as at 31 March 2007. The variations between this averaging and
proposals made to the October 2009 were not considered materially
significant.
3.
For the 2010 national fund valuation, we are now proposing the
adoption of the general set of assumptions first considered in October 2009,
but with fine tuning based on an analysis of experience for the period 200407; 2007-08 and 2008-09 which GAD is close to completing. This latest
analysis is based on an amalgamation experience valuation and cashflow
data which GAD has so far received from some 95% of Administering
Authorities.
4.
PRG has also previously considered a timetable, prepared by GAD,
which reflects the statutory obligation on Administering Authorities to submit
their valuation data to GAD by no later than 31st August, earlier where
possible, and 2009-10 experience and cashflow analysis as soon as it is
available.
Cap & Share 2010 Model Fund – Assumptions & Methodology
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5.
At the last PRG meeting (17th March) CLG circulated paper CLG (10)
PRG 39, a copy of a paper jointly prepared by HMT and GAD. It highlighted
the scope of applying common assumptions as a framework to manage all
Public Sector Pension Schemes (funded and unfunded). The assumptions
proposed in that paper are, in many respects, comparable with the LGPS
proposals, but the need for the LGPS national fund to reflect the actuality of
valuing individual funds which reflect individual experience and specific
assumptions while the national fund must reflect, as far as is practicable,
actual LGPS Scheme specific experience, has been re-iterated on several
occasions over the last few months.
Next Steps
6.
In order to meet the statutory timetable, PRG members are invited to
consider and agree the assumptions which will be used for the 31 March 2010
national fund valuation exercise. The general assumptions to be adopted are
set out in paragraphs 7-9 below. Final decisions, involving Ministers, need to
be made before the Summer Recess.
Assumptions and Methodology for the National Model Fund
7.
Methodology

Assets – for the purposes of the National Model Fund, the ‘notional’
assets will be set equal to the accrued liabilities at the date when cost
share begins ie as at 31 March 2007. The notional assets will then be
rolled forward with investment returns, contribution income, benefits
paid and any other relevant miscellaneous items to the next valuation
date.

Liabilities – Projected Accrued Benefits method is used for calculating
the scheme liability. Under this methodology, the value of the accrued
liabilities at the valuation date is taken as the present value of all
expected future benefit payments arising in respect of service prior to
the valuation date. The actuarial liability in respect of active members
includes an allowance for future salary increases up to the assumed
date of retirement or earlier exit, and for subsequent revaluation and
pension increases. For pensions in payment and deferred members,
the actuarial liability includes allowance for future pension increases
(and revaluation in deferment).

Future costs – to calculate the future accrual of LGPS benefits, most
funds have adopted the Projected Unit Method (PUM) with one-year
control period. Under this method a standard contribution rate
expressed as a level percentage [% SCR] of pensionable payroll is
determined as the rate which, if payable over the year following the
valuation date, would be enough to meet the expected cost arising
from benefits accrued over that year.
Cap & Share 2010 Model Fund – Assumptions & Methodology
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8.
Financial Assumptions

Real investment return over price inflation – for the Dummy Model
Fund a real discount rate over price inflation of 3.5% pa was adopted.
This rate will also be the assumed real investment return on the
National Model Fund.
This compares to an average discount rate of around 3.1% adopted by
the fund actuaries at the 2007 round of valuations (and close to 3.5% in
2004).

Real investment return over general earnings inflation – for the
purposes of the National Model Fund a real investment return over
earnings inflation of 2% pa a year will be used. This compares to an
average of around 1.6% adopted by the fund actuaries at the 2007
round of valuations.
A real investment return over general earnings inflation of 2%
combined with a real discount rate of 3.5% implies that real earnings
growth in excess of price inflation is assumed to 1.5% a year.

Price Inflation – given the inflation-linked nature of most LGPS benefits,
the assumed rate of price inflation is not a particularly significant
assumption – particularly if the inflation experience of the scheme is
not one of the shareable items in the cost share. Nevertheless, it is
assumed for the National Model Fund that price inflation will average
around 2.9% a year.
When combined with a real discount rate of 3.5%, this gives a gross
investment return assumption of 6.5%.
((2.9 ÷ 100 +1) x (3.5 ÷ 100 +1) – 1) x100 = 6.5%
9.

Pensioner Longevity Assumptions
For the purposes of the National Model Fund the baseline mortality
assumption will reflect actual LGPS experience. Future improvements in
longevity are currently assumed to be in line with population projections
produced by the Office for National Statistics (ONS) – the last projections
were published in October 2007. However, this assumption may need to
be varied to ensure the experience within the LGPS is properly reflected.
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Valuation Timetable
10.
PRG is invited to note the following proposed programme of steps as
currently envisaged. Any practical difficulties should be raised at the meeting
or subsequently. Any steps needed to resolve should also be raised as soon
as possible.
2010
Cap and Share Timetable
CLG/GAD/PRG Actions
April
Preparation for Cap and Share
Model Fund

GAD to collect LGPS
experience valuation and
cashflow data for
2007/08 and 2008/09
from all administering
authorities.

GAD analysing the
above data.
May
June
PRG meeting on 2nd June to
further discuss assumptions for
the model fund and initiate
discussions on ‘employers cap’.

PRG to agree on set of
assumptions to be used
for the 2010 National
Fund Valuation exercise.
July
1st July PRG meeting – to allow
further discussion.

GAD to provide fine
tuning assumptions for
the national fund for
PRG to consider.

PRG views to Ministers
on an agreed set of
assumptions for the
national fund.

GAD starts valuation
process.
22nd July PRG meeting – to
finalised arrangements.
Ministers to be advised on
assumptions for the model
fund. Ministers decide on
assumptions and announce.
GAD to receive 2009-10
experience valuation data from all
admin authorities.
August
All triennial valuation data
supplied to GAD by end of
August AT THE LATEST

GAD assessments and
modelling underway.
September
Early indications to CLG from
GAD and fund actuaries of
potential 2010 valuation results

GAD to prepare 2010
national valuation report

PRG to discuss use of
Cap ‘trigger factors’

GAD’s report and PRG
views considered and
reported to Ministers.
PRG meet in mid September
October
GAD to submit final 2010
valuation report to CLG by 31st
October.
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PRG meeting to consider finding.
November
December
Ministerial Decision on Cap
and Share ‘Next Steps’ in light
of GAD report on approach or
start immediate statutory
consultation to amend the
LGPS to implement cap and
share.

CLG to consult on
Ministers’ decision.
PRG meeting to discuss outcome.

PRG meets to discuss
next steps.

Responses considered
and report to Ministers
GAD to submit supplementary
report (if required) to SofS (if
analysis of 2009-10 experience
data alters materially assumptions
adopted for the model fund).
Fund actuaries report valuation
results, including employers’
contribution rates for the 3 year
period of 2011/12 to 2013/14.
2011
January
Possible consultation exercise on
cap and share finishes.
PRG meets to consider report
assessed on findings.
Ministers to decide on the
outcome and proceed to amend
the regulations, if Cap and
Share necessary and
appropriate.
February
LGPS advised of proposed
changes. Actuaries re-consider
final valuation reports and
employers` contributions

Local authorities to
finalise budgets.
March
Fund actuaries revisit valuation
reports in the light of any
amendments, statutory guidance
and, possibly, impact of the 2011
LG Settlement finalising next
triennial contribution rates –
effective from 2011 or 2012

Action as appropriate by
local government in
discussion with CLG.
Communities and Local Government
May 2010
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