A number of local government pension schemes face cash flow problems as a result of the coronavirus crisis, according to a recent survey.
The survey, carried out by the Local Government Pension Scheme Advisory Board, polled 82 administering authorities across the UK, and found that 5 per cent of respondents anticipated cash flow issues in 2020-21, with a further 8 per cent saying they considered such issues a definite possibility.
Despite the almost-unprecedented turmoil caused by the coronavirus pandemic, 87 per cent of those polled reported no cash flow concerns at present, though that picture may change should the disruption continue much longer.
Jeff Houston, secretary to the Local Government Pension Scheme Advisory Board, told Pensions Expert that the overall picture is positive.
You need to strike a balance between contributions being paid into the scheme and benefits being paid out, as well as managing cash flows out from advance commitments to funds
Dan Mikulskis, LCP
“The vast majority of LGPS authorities across the UK seem to have things in good order,” he said.
“There were some issues raised within the survey, but nothing that would cause us great alarm.”
Of the 13 per cent who reported having or expecting to have cash flow issues, Mr Houston said: “It’s not the case that they won’t be able to pay their pensioners. The problem, if there is one, is going to be more about finding cash at a particular time from a particular source.
“You’ve got the combination, potentially, of the fund having some cash flow issues, and at the same time the local authority – because of what else is going on – also having some cash flow issues, so the potential for internal borrowing is perhaps not as flexible as it would normally be.”
Situation could worsen
As previously reported by Pensions Expert, schemes that were in a poor funding position before the pandemic struck are going to be hit hardest by the crisis, with research suggesting that the funding gap will be exacerbated as a result.
The report added that cash flow problems may begin to mount if the pandemic rumbles on, as “a number of funds indicated that their ‘no’ answer may change should this situation continue, or get worse, for much of the year”.
Responding, Mr Houston said: “We all need to wait and see. A lot of it will be to do with employer contributions coming in.
“We’ve only had one month of requests for employer contributions. We need to see are they coming in, are they coming in on time, or are they being delayed. We need to see if any employers do come forward and ask for deferrals, and we need to get a clearer picture on dividend income and whether that’s going to be affected.”
A number of employers have shifted to making shorter-term contributions, with the survey finding that “some major employers intending to prepay three years of contributions have now decided to pay just one year’s worth upfront and will review again next year.”
But it will come as some relief that, of the 82 respondents to the survey, only 7 per cent reported receiving any request from employers to delay or reduce their contributions; though the qualifier is again that this may change should the crisis linger late into the year.
LGPS to learn lessons of private sector
LGPS administering authorities will have to manage cash flows carefully if they are to avoid running into problems further down the road, said Dan Mikulskis, partner at LCP.
“One area it is important to manage carefully is cash flow, so that schemes of all types are not forced into selling assets that they don’t want to,” he said.
“You need to strike a balance between contributions being paid into the scheme and benefits being paid out, as well as managing cash flows out from advance commitments to funds.”
There are various ways to manage that, he added: “For example, you could take income from bond assets. Usually this would be reinvested.
“You could look at treasury management-type options on the [liability-driven investment] or gilt portfolio, or at releasing excess collateral, or other ways of increasing scheme investment efficiency to free up cash.”
LGPS returns to drop by almost half in next decade
As the world faces global meltdown and investors are set to receive lower and more volatile returns for the next decade or more, new research suggests that some local authority pension schemes may be overestimating their potential growth.
Louis-Paul Hill, investment consultant at Aon, agreed. “LGPS funds should ensure they have effective cash flow management policies in place and stress test these to determine what actions (if any) are needed to ensure all cash flows can be met under any circumstance and without impacting on the performance of the fund,” he said.
The LGPS Advisory Board will continue to take surveys in the coming months and assess any changes, but so far “people are coping”, Mr Houston said.
“It’s a process of sharing,” he added. “Those authorities who may have some issues know that they’re not alone, and we can bring them together to have a conversation, and we can find out what best practice is and what solutions there may be.”
