Agenda item

The actuary has been invited to explain the potential impact on the LGPS funds if the Fair Deal is abolished. The Government has consulted on this, but the consultation period ended before this committee was convened.

The Investments Manager reported that the Government’s consultation on the Fair Deal had just ended. If the Fair Deal was abolished or substantially reformed there could be serious implications for the Fund.

The Chair welcomed Paul Middleman of Mercer Limited to the meeting. Mr Middleman made a presentation; a copy of his slides is attached as Appendix 1 to these minutes. He said that there were currently two options when functions were contracted out from the local authorities to the private sector: either outsourced staff could remain in the local authority pension fund through the use of admitted body status, or they could be enrolled in a broadly comparable scheme maintained by the contractor. It was the contractor’s choice which of these would apply. The admitted body route was the more common one for employees in the Local Government Pension Scheme. Currently about 5% of the members of the LGPS were employed by admitted bodies. The Government was concerned that the current arrangements were a potential barrier for the outsourcing of public sector functions, so had initiated a consultation on whether the Fair Deal should be abolished or modified. The response to the consultation submitted on behalf of the Avon Pension Fund had argued that Fair Deal should be maintained but modified. Mr Middleman thought that if Fair Deal were abolished, it would be difficult for the LGPS to maintain current membership levels and that it would face increased volatility in relation to contributions and funding levels. As shown in the graph on page 4 of the presentation, the crossover point after which LGPS funds might have to use cash or sell assets to pay benefits could shift forward by about 8 years. Organisational restructuring resulting in a large number of redundancies at the same time would have a significant impact on LGPS funds.

A Member asked how additional costs could be incurred through staff leaving the Fund. Mr Middleman replied that while there were no additional costs when individual employees left the Fund, the Fund would be less able to pursue a higher-risk strategy and would have to invest more in defensive assets. A 4% decline in membership would cause a significant increase in volatility. Mr Middleman agreed with the Member’s comment that the Fund would benefit from a reduction in the number of high earners who were members.

In reply to questions about the reasons for staff choosing to opt out of the Fund now, Mr Middleman said that people were behaving irrationally because of pressure on pay and a lot of misinformation. However, he would expect a fall in membership of about 20% if the Fair Deal was abolished. A Member responded that their behaviour might not seem so irrational when it was considered that employees were seeing steep rises in contributions and a fall in the value of their pensions; a contribution rate of 3.5% of total pay would mean a 50% increase in contributions and a change in the accrual rate from 1/80^th to 1/100^th would mean a 40% reduction in pension. The Chair suggested that a workshop could be arranged for Members to review this wider context after the Government had announced its decision on Fair Deal.

The Director of Resources and Support Services said that not only was there a danger of a “race to the bottom”, as Hutton had warned against, but also of a race to the exit. The prospect of a 20% fall in membership was really worrying. There would probably be a bigger deficit to fund, but fewer active members, so the current investment strategy would have to be altered. Hutton had emphasised that the LGPS was different because it is a funded scheme. There was a need for more effective communication with fund members; it was important that they were not panicked into leaving the Fund.

The Chair asked how communications with members would be handled. The Head of Finance, Business and Pensions said that information would be added to the website the following week. A Member said that the information on the website was not enough; it was important to involve the employers. The Pensions Manager said that data on opt-outs was being collected and could be presented to the Committee. Members agreed that this information should be presented regularly.

The Chair thanked Mr Middleman for his presentation.