Inconsistencies and lack of standardisation in information are frustrating efforts to make a ‘like-for-like’ comparison between local authority funds in Scotland, a new government report has found.
The Government Actuary’s Department, which published the Local Government Pension Scheme Scotland Report at the tail end of last year, is urging these schemes to develop a basis for standardised calculations.
The body also suggested that Scottish authorities should adopt the disclosure standards in place at LGPS England and Wales, so that their data can be comparable.
Martin Clarke, government actuary, and Michael Scanlon, an actuary at the GAD, the authors of the report, believe that that local circumstances may merit different assumptions at the Scottish pension schemes. “Financial assumptions are affected by the current and future planned investment strategy, [with] different financial circumstances leading to different levels of prudence adopted,” they said.
Calculating the discount rate in a lot of different ways confused Joe Public. Our aim is to introduce consistency and clarity
Bob Holloway, LGPS Scheme Advisory Board
“However, there appears to be a strong link between the discount rate and the firm of actuarial advisers [used], rather than the differences reflecting the local circumstances of the funds,” they stated.
Actuarial advisers to blame
The report shows that Scottish local authority funds advised by Hymans Robertson tend to use the lowest real discount rate, those advised by Mercer sit in the middle of the range, while the funds advised by Barnett Waddingham have the highest real discount rate used for assessing past service liability values.
The authors “encourage all stakeholders to move towards assumptions differing from one fund to another only where local conditions justify it”.
However, they noted: “There has been a big improvement in the consistency of presentation of disclosures such as employer contribution rates in the 2017 valuations, compared with the 2014 valuations.”
The report advises the Scottish Public Pensions Agency to mirror the approach of the LGPS Scheme Advisory Board for England and Wales, which has already implemented a standard way of presenting relevant disclosures in all its valuation reports to better facilitate comparisons.
England and Wales local authority funds have made a head start on this due to their valuation cycle being a year ahead of their Scottish counterparts.
Consistency is the goal
Bob Holloway, pensions secretary of the LGPS Scheme Advisory Board, said the reforms are “about achieving greater consistency, so that anybody outside the actuarial profession can make sense of the 88 individual valuation reports that are published in England and Wales”.
“We are starting to see the reports of the 2019 valuations, so at the back of each valuation there will now be a standard dashboard with consistent information. These cover areas like the discount rate.”
Mr Holloway added: “Calculating the discount rate in a lot of different ways confused Joe Public. Our aim is to introduce consistency and clarity.”
Commenting on the report, the SPPA welcomed the GAD’s report and said it is considering the recommendations in close discussion with the LGPS Scheme Advisory Board and administering authorities.
LGPS pension bill to rise 1% with McCloud case
Fears that a legal case over discriminatory pensions could dent the funding of the Local Government Pension Scheme have been partially allayed, after preparations for the plan’s valuation found that liability increases will be limited.
“The SPPA is committed to providing excellent customer service and combining skills and technology to maximise efficiency and deliver best value to taxpayers in Scotland,” it said.
According to Barry McKay, partner and fund actuary at Barnett Waddingham, the objective to provide consistency of disclosures and funding levels on standardised assumptions is welcomed and sensible, which is something the actuarial firms have been doing for some time.
“However, we need to be aware of unintended consequences,” he said.
“In the private sector, a standard known as the minimum funding requirement was introduced some years ago. This was designed to improve overall solvency levels, but arguably did the opposite as schemes moved to a less conservative basis, resulting in lower contributions.
“It is therefore important that local funding valuations determine the actual contributions to be paid, and funds take account of their own specifics such as investment strategy, longevity and attitude to risk.”
