Lancashire increases employer contributions to mitigate maturing membership

It is the latest local authority scheme to take measures as a result of maturing demographics. In 2012, Greater Manchester Pension Fund set up a working group to review its investment strategy in expectation of a falling active membership. 

Lancashire’s participating employers will collectively pay an increasing annual payment starting at £81m on top of an average contribution of 13.1 per cent of pensionable pay.

The amount of the contribution each employer pays depends on the extent to which they are in deficit or surplus.

Colin Smith, pension services technical adviser, said the scheme decided as a result of its 2013 valuation, released this week, to recover the deficit by way of lump-sum contributions rather than on a percentage basis.

“Within local government the workforces are diminishing, so you can’t rely on the number of active members to collect the amount you [can] by doing it as a lump sum from employers, rather than a percentage of employees,” he said.

The average employer contribution at the scheme’s 2010 valuation was 19.1 per cent.

“We do see some cases where [among] some of the biggest employers, as a result of job losses and outsourcing, the membership could have fallen between 20 and 30 per cent in between valuations,” said John Wright, head of public sector at consultancy Hymans Roberston.

This means cash flows are less positive than they were three years ago, said Wright.

Tim Lunn, head of the UK public sector actuarial team at consultancy Aon Hewitt, said he has seen a general pattern of decreasing active membership in local government schemes across England.

“Many of the larger employers have deferred the implementation of auto-enrolment for existing employees until 2017 – so we may see some recovery then,” said Lunn.

Lunn added that in his experience many schemes moved to funding strategies which involved payment of scheduled monetary deficit contributions rather than contributions linked to payroll, as a first response to this trend.

Funding gap

Lancashire’s funding level dropped to 78 per cent at March 31 2013 from 80 per cent in 2010, according to the scheme’s 2013 actuarial valuation report.

However, the funding level rose to 82 per cent at August 31 2013 due to an increase in gilt yields that underpin the calculation of past-service liabilities.

For employers that are judged by the administering authority to “provide a high level of financial covenant”, and are also required to increase their contributions for 2014/15 beyond that agreed at the last valuation, an allowance may be made to lower the fund’s projected liabilities over time.

This would reduce the amount of contributions for the employer during the recovery period.

Local authority schemes with decreasing active memberships have been urged to forecast the impact on the cash flow of a large proportion of members retiring in a short period.

Wright said this has led to some schemes requiring participating employers to make contributions in lump sums rather than as a percentage of employees’ pensionable pay, so they receive the same level of contributions despite a reduction in payroll.

“You may find a one-size-fits-all investment strategy will be increasingly less tenable,” he added.

Some schemes may have moved to funding strategies which involved payment of scheduled monetary deficit contributions rather than contributions linked to payroll, as a first response.

To mitigate this trend, Lund said administering authorities can ensure the scheme is well marketed to maximise take-up or reduce opt-out levels, which would help ensure deficit contributions are not eroded.

If necessary they could also consider evolving their investment strategy to maintain income levels, he added.