The Local Government Pension Scheme (LGPS) is facing several major challenges – but also presents good value, according to Hymans Robertson.

Delegates at the Pensions and Lifetime Savings Association’s (PLSA) Local Authority Conference were told that the LGPS represented good value for the taxpayers that help fund it, but those running funds should not be resting on their laurels.

Catherine McFadyen, partner and head of LGPS consultant at Hymans Roberston, said funding strategies needed to adapt to current conditions.

She told delegates at the DeVere Cotswold Waterpark in Gloucestershire that LGPS funds were still assuming that assets held, together with future returns, would be enough to pay future benefits.

She said: “This is money you don’t have yet [and] even with 100% funding there is a lot of work to do.”

McFadyen said schemes needed to decide how much advantage they took of a rise in bond yields, which had fed through to individual annuities and the risk transfer market.

“What does this mean for the LGPS and can we use this to generate higher returns?” she said.

According to the latest LGPS annual report, schemes in England and Wales allocated an aggregate 8% of total assets to UK government and corporate bonds – equivalent to approximately £28 billion.

Post-Covid and mortality
Another challenge facing LGPS funds was shifting mortality rates after the Covid-19 pandemic.

McFadyen said 2023 data showed that longevity was on the rise, after a dip in mortality during the pandemic and immediate post-pandemic years.

She said: “It [mortality] then shot up, but we may want to put more weight on the Continuous Mortality Investigation’s published data at the end of 2023 and less on 2022 estimates going forward.

“There is no indication that longevity risk is going to impact funding and it feels like we have a reasonable handle on it.”

McFadyen said the LGPS provided good value to the taxpayer compared to other public pension schemes and added that, if this continued, it could become self-sustaining over the long term.

“We must continue to communicate the benefits of our invested assets and how they drive positive impacts in the community and beyond,” she added.

The gender pensions gap
The gender pensions gap was an unsolved challenge that could prove to be an issue for the LGPS in the future, McFadyen said.

Data from Legal & General shows that women aged over 50 typically have less than half the amount saved in their pension pots than men of the same age.

Unless more was done in the private and public sectors, many more women would face poverty in retirement, she warned.

“It is a slow-motion pension saving car crash,” she said.

McFadyen argued that private pension inadequacy was “the biggest threat to LGPS sustainability”.

“As more defined benefit [DB] schemes close, they are replaced by defined contribution schemes with 8% contributions, and this is widening the pension gap,” she said. “For social cohesion this does have to change.”

McFadyen also warned of further scrutiny: “With the private sector DB landscape in great shape, could the regulator and policy makers turn their heads to public sector schemes?”

 

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Published: June 14, 2024
Home » Challenges facing the LGPS: Gender pensions gap, funding, mortality
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