CLG (10) PRG 47
LOCAL GOVERNMENT PENSION SCHEME
POLICY REVIEW GROUP
Cap and Share 2010 Model Fund
1. Paper CLG(10) PRG 44 was tabled at the last PRG meeting on 2 June,
setting out the assumptions to be used for the 2010 national valuation
exercise. At that meeting business partners were asked to submit any
fundamental issues of concern they had with the paper preferably within 10
days of the meeting. No substantive comments have been received, apart
from the corrective addition to the note of the meeting concerning the long
standing issue of the choice of an appropriate discount rate, which should
now mean this particular aspect is resolved. Subject to the observations in
this paper that set of assumptions in PRG 44 will be recommended as
accepted by the Secretary of State for use in the guidance note which GAD is
required to produce by October this year.
2. One other point was raised as an action point concerning the use of
different spread periods. It is important to note that the spread periods within
the model fund assumptions, wherein the fund is assumed to have assets at
the outset covering 100% of liabilities, are not directly comparable to spread
periods used at local fund level. For a local fund the issue being managed, in
line with the relevant Funding Strategy Statement, is the deficit between
assets and liabilities. Within the national fund the spread period is used as a
means of dealing with differences between experience and assumption – for
example, how many deaths are expected to occur during a three year period
and the actual number of deaths within the Scheme.
3. But for the record GAD has now provided the following detail by way of
illustration
3.1 One of the key assumptions to calculate the spread of any past
service costs/savings is the assumption for the real rate of return net of
general pay inflation –this rate is assumed to be 2% pa which is the
assumption used for the ‘dummy’ model fund exercise (which has now
been agreed as the baseline for cap and share). No account has been
taken of any pay agreements in place for the purposes of this exercise.
3.2 Assuming a liability of around £150 billion and pensionable payroll
of about £30 billion at the 2010 valuation, the table below illustrates the
impact on the overall contribution rate of using different spreading
periods should a surplus/deficit emerge. These additional costs/savings
are rounded to the nearest 0.1% of pensionable payroll.
Cap & Share 2010 Model Fund
1
Assumed
Assumed
Impact on contribution rate (as % of
surplus/deficit surplus/deficit pensionable payroll) if surplus/deficit is
at the 2010 at the 2010 spread over:
model
fund model fund
valuation as valuation
% of liability (£ billion)
10
15 years
20 years
years
(MOCOP
(average of
standard
2007
assumption)
valuations)
1%
1.5
0.6%
0.4%
0.3%
5%
7.5
2.8%
1.9%
1.5%
10%
15
5.5%
3.9%
3.0%
3.3 As an example, if at the 2010 model fund valuation a 1% past
service deficit emerges then a way would need to be found to reduce
the annual costs by 0.6% of pensionable payroll if the deficit is
expected to be recovered over the next 10 years. The other figures
shown in the table can be interpreted in a similar way.
4. Subsequent to the PRG it was announced in the Budget Statement on 22
June that from April 2011 the Government intends to move from the use of
RPI to CPI to meet the obligation under Pensions Increase legislation to
provide a cost of living increase to both pensions in payment and those
deferred rights of members who left without immediate entitlement to payment
of a pension. Although this change will not impact on the discount rate to be
used, there are likely to be changes related to the costing of other liabilities
within the Scheme. Further exemplifications of the likely impact both to the
1997 model and the 2010 valuation exercise will be provided by GAD when
the central policy team involved have clarified several legal and other issues.
5. Finally, GAD will be providing a report in July on the outcome of their
sensitivity analyses based on experience data covering the period from 2004
to 2009. This will enable all parties to move to the next stage of this process,
where it will be necessary to discuss the nature and level of the cap to be
used as part of the national fund and final agreement on items subject to
sharing (previously discussed in paper CLG (08) PRG 20 at 3 July 2008
meeting. The Cap and Share cost factors are listed at Annex A.
Communities and Local Government
June 2010
Cap & Share 2010 Model Fund
2