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This Statement has been prepared by North Yorkshire County Council (the Administering Authority) to set out the funding strategy for the North Yorkshire Pension Fund (the NYPF), in accordance with Regulation 58 of the Local Government Pension Scheme Regulations 2013 (as amended) and the 2016 guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA) Pensions Panel.
1.
Introduction
The Local Government Pension Scheme Regulations 2013 (as amended) (“the Regulations”) provide the statutory framework from which the Administering Authority is required to prepare a FSS. The key requirements for preparing the FSS can be summarised as follows:
§ After consultation with all relevant interested parties involved with the Fund, the Administering Authority will prepare and publish their funding strategy.
§ In preparing the FSS, the Administering Authority must have regard to: -
§ the guidance issued by CIPFA for this purpose;
§ the supplementary statutory guidance issued by MHCLG (now DLUHC): Guidance on preparing and maintaining policies on review of employer contributions, employer exit payments and deferred debt agreements; and
§ the Investment Strategy Statement (ISS) for the NYPF published under Regulation 7 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (as amended);
§ The FSS must be revised and published whenever there is a material change in either the policy on the matters set out in the FSS or the ISS.
The Administering Authority has also considered the Scheme Advisory Board's Guide to Employer Flexibilities for Administering Authorities and Employers in developing the FSS with details on the Fund’s policy on these flexibilities set out in the Admissions and Terminations Funding Policy.
Benefits payable under the NYPF are guaranteed by statute and thereby the pensions promise is secure. The FSS addresses the issue of managing the need to fund those benefits over the long term, whilst at the same time, facilitating scrutiny and accountability through improved transparency and disclosure.
The Scheme is a defined benefit arrangement with principally final salary related benefits for contributing members up to 1 April 2014 and Career Averaged Revalued Earnings (“CARE”) benefits earned thereafter. There is also a “50:50 Scheme Option”, where members can elect to accrue 50% of the full scheme benefits and pay 50% of the normal member contribution rate.
The benefits provided by the NYPF are specified in the governing legislation (the Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014) and the Regulations referred to above. The required levels of employee contributions are also specified in the Regulations.
Employer contributions are determined in accordance with the Regulations which require that an actuarial valuation is completed every three years by the actuary, including a rates and adjustments certificate. Contributions to the NYPF should be set so as to “secure its solvency” and to "ensure long-term cost efficiency", whilst the actuary must also have regard to the desirability of maintaining as nearly constant a primary rate of contribution as possible. The actuary must have regard to the FSS in carrying out the valuation.
2. Purpose of the FSS in Policy Terms
Funding is the making of advance provision to meet the cost of accruing benefit promises. Decisions taken regarding the approach to funding will therefore determine the rate or pace at which this advance provision is made. Although the Regulations specify the fundamental principles on which funding contributions should be assessed, implementation of the funding strategy is the responsibility of the Administering Authority, acting on the professional advice provided by the actuary.
The purpose of this Funding Strategy Statement is:
§ to establish a clear and transparent fund-specific strategy which will identify how employers' pension liabilities are best met going forward;
§ to support the desirability of maintaining as nearly constant a primary contribution rate as possible;
§ to ensure the regulatory requirements to set contributions so as to ensure the solvency and long-term cost-efficiency of the fund are met; and
§ to take a prudent longer-term view of funding those liabilities
The intention is for this strategy to be both cohesive and comprehensive for the NYPF as a whole, recognising that there will be conflicting objectives which need to be balanced and reconciled. Whilst the position of individual employers must be reflected in the statement, it must remain a single strategy for the Administering Authority to implement and maintain.
3. Aims and Purpose of the NYPF
The aims of the Fund are to:
§ enable primary contribution rates to be kept as nearly constant as possible and (subject to the Administering Authority not taking undue risks) at reasonable cost to the taxpayers, scheduled, resolution and admitted bodies, whilst achieving and maintaining fund solvency and long-term cost efficiency, which should be assessed in light of the risk profile of the fund and employers, and the risk appetite of the Administering Authority and employers alike
§ manage employers’ liabilities effectively
§ ensure that sufficient resources are available to meet all liabilities as they fall due, and
§ seek returns on investments within reasonable risk parameters.
The purpose of the Fund is to:
§ receive monies in respect of contributions, transfer values and investment income,
§ and pay out monies in respect of scheme benefits, transfer values, costs, charges and expenses as defined in the Regulations and in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.
4.
Responsibilities
of Key Parties
The Administering Authorityshould:
§ operate a pension fund
§ collect employer and employee contributions, investment income and other amounts due to the pension fund as stipulated in LGPS Regulations
§ pay from the pension fund the relevant entitlements as stipulated in LGPS Regulations
§ invest surplus monies in accordance with the Regulations
§ ensure that cash is available to meet liabilities as and when they fall due
§ manage the valuation process in consultation with the NYPF’s actuary
§ prepare and maintain an FSS and an ISS, both after proper consultation with interested parties, monitor all aspects of the NYPF’s performance and funding and amend the FSS/ISS accordingly
§ effectively manage any potential conflicts of interest arising from its dual role as both fund administrator and scheme employer
§ enable the local pension board to review the valuation process as set out in their terms of reference.
§ determine the amount of any exit credit following the exit of an individual employer from the Fund in accordance with the Fund's Admissions and Terminations Funding Policy.
§ ensure consistent use of policies relating to revising employer contributions between formal valuations, entering into deferred debt arrangements and spreading exit payments and ensure the process of applying those policies is clear and transparent to all fund employers.
The Individual Employer should:
§ deduct contributions from employees’ pay correctly after determining the appropriate employee contribution rate (in accordance with the Regulations)
§ pay all contributions, including their own as determined by the actuary, promptly by the due date
§ develop a policy on certain discretions and exercise those discretions as permitted within the regulatory framework
§ make additional contributions in accordance with agreed arrangements in respect of, for example, augmentation of scheme benefits and early retirement strain notify the Administering Authority promptly of all changes to membership or, as may be proposed, which affect future funding
§ pay any exit payments on ceasing participation in the NYPF
§ notify the Administering Authority of any material change in financial circumstances for the employer
The Fund actuary should:
§ prepare valuations including the setting of employers’ contribution rates at a level to ensure fund solvency and long-term cost efficiency after agreeing assumptions with the Administering Authority and having regard to the FSS and the LGPS Regulations
§ prepare advice and calculations in connection with bulk transfers and the funding aspects of individual benefit-related matters such as pension strain costs, ill health retirement costs, compensatory added years costs etc,
§ provide advice and valuations on the exiting of employers from the NYPF
§ provide advice to the Administering Authority on bonds or other forms of security against the financial effect on the fund of employer default
§ assist the Administering Authority in assessing whether employer contributions need to be revised between valuations as permitted or required by the Regulations, in particular in relation to any review of contributions between triennial valuations under Regulation 64A
§ provide views in relation to any decision by the Administering Authority to spread an exit payment under Regulation 64B
§ ensure that the Administering Authority is aware of any professional guidance or other professional requirements that may be of relevance to his or her role in advising the NYPF
§ advise on funding strategy, the preparation of the FSS, and the inter-relationship between the FSS and the ISS.
5. Solvency Issues and Target Funding Levels
Funding Objective
To
meet the requirements of the Regulations the Administering
Authority’s long term funding objective is for the Fund to
achieve and then maintain sufficient assets to cover 100% of
projected accrued liabilities (the ”funding target”)
assessed on an ongoing past service basis including allowance for
projected final pay in relation to pre-2014 benefits or where the
underpin applies. In the long term, the employer rate would
ultimately revert to the Primary Contribution Rate (also known as
the Future Service Rate).
Determination of the Funding Target and Recovery Period
The
principal method and assumptions to be used in the calculation of
thefunding target as at 31 March 202219 are set out in Appendix
1.
Underlying these assumptions are the following two principles:
§ that the Scheme is expected to continue for the foreseeable future; and
§ favourable investment performance can play a valuable role in achieving adequate funding over the longer term.
This allows us to take a longer term view when assessing the contribution requirements for certain employers. As part of this valuation when looking to avoid material, and potentially unaffordable, increases in employer contribution requirements we will consider whether we can build into the funding plan the following: -
§
stepping in of
contribution rate changes for employers
where the orphan funding target is adopted or where the
intermediate funding target is being introduced (as defined later
in this statement). For the 202219 valuation, the Administering
Authority’s default approach is to step any contribution
increases changes over a period of 3 years,
although in certain circumstances a longer period may be
considered, after consultation with the Actuary.
§ a longer deficit recovery period than the average future working lifetime, particularly where there are a number of younger active members.
In considering this the Administering Authority, based on the advice of the Actuary, will consider if this results in a reasonable likelihood that the funding plan will be successful.
As part of each valuation separate employer contribution rates are assessed by the actuary for each participating employer or group of employers. These rates are assessed taking into account the experience and circumstances of each employer, following a principle of no cross-subsidy between the distinct employers in the Scheme, other than where grouping of employers has been agreed in line with the policy set out in the Fund's Admissions and Terminations Funding Policy.
In attributing the overall investment performance obtained on the assets of the Scheme to each employer a pro-rata principle is adopted. This approach is effectively one of applying a notional individual employer investment strategy identical to that adopted for the Scheme as a whole (except where an employer adopts a bespoke investment strategy – see below).
The
Administering Authority, following consultation with the
participating employers, has adopted the following objectives for
setting the individual employer contribution rates arising from the
202219 actuarial valuation:
§ A default recovery period of 15 years will apply for open employers that are assessed to have a deficit.
§ A default recoveryperiod equal to the average future working lifetime of the membership of the employer will apply for closed employers that are assessed to have a deficit.
§
In
addition, at the discretion of the Administering authority, a
maximum deficit recovery period of 1821 years will apply. Employers will
have the freedom to adopt a recovery plan on the basis of a shorter
period if they so wish. A shorter period may be applied in respect
of particular employers where the Administering Authority considers
this to be warranted (see Deficit Recovery Plan below).
§
As
a general rule, the Fund does not believe it appropriate for
contribution reductions to apply compared to the 2016 2019 funding plan for those
employers where substantial deficits remain.
§
For
any open employers assessed to be in surplus, their individual
contribution requirements will be adjusted at the 2019 2022 valuation as
follows:
- Where the funding level is 100-110% employers will pay the future service rate only.
-
Where the
funding level is over 110% the default approach for Scheduled
Bodies and Admission Bodies with no subsumption commitment from a
Scheduled Body in the Fund (as defined in Appendix 1) will be to
remove any surplus in excess of 10% over a maximum period of
2118 years.
-
Where the
funding level is over 110% the default approach for Admission
Bodies with a subsumption commitment from a Scheduled Body in the
Fund will be to remove any surplus in excess of 10% over the
recovery period adopted by that Scheduled Body at the
201922 valuation.
- If surpluses are sufficiently large, contribution requirements will be set to a minimum nil total amount.
- The current level of contributions will be stepped down as appropriate, consistent with the approach of stepping contribution increases where appropriate.
For the avoidance of doubt, for practical purposes where employers are in surplus and contributions are to be set below the cost of future accrual this will be implemented via a reduction in the percentage of pensionable pay rate rather than via a negative monetary amount.
For any closed employers assessed to be in surplus, the above approach will generally be followed but the Administering Authority will consider the specific circumstances of the employer in setting an appropriate period to remove the surplus.
The employer contributions will be expressed and certified as two separate elements:
§ a percentage of pensionable payroll in respect of the future accrual of benefit (less allowance for surplus as appropriate)
§
a
schedule of lump sum amounts over 20230/236 in respect of the past service
deficit subject to the review from April 20263 based on the results of the
20252 actuarial valuation.
On the cessation of an employer’s participation in the Fund, the actuary will be asked to make a termination assessment. Any deficit in the Fund in respect of the employer will be due to the Fund as a termination contribution, unless it is agreed by the Administering Authority and the other parties involved that the assets and liabilities relating to the employer will transfer within the Fund to another participating employer.
However, the Administering Authority has ultimate discretion where the particular circumstances of any given Employer warrant a variation from these objectives. A period of consultation will take place once employers have been issued with their draft contribution rates.
In determining the above objectives, the Administering Authority has had regard to:
§ the responses made to the consultation with employers on the FSS principles
§ relevant guidance issued by the CIPFA Pensions Panel
§ the need to balance a desire to attain the target as soon as possible against the short-term cash requirements which a shorter period would impose, and
§ the Administering Authority’s views on the strength of the participating employers’ covenants in achieving the objective.
Deficit Recovery Plan
If the assets of the scheme relating to an employer are less than thefunding target at the effective date of any actuarial valuation, a recovery plan will be put in place, which requires additional contributions from the employer to meet the shortfall.
Additional contributions will be expressed as annual monetary lump sums, subject to review based on the results of each actuarial valuation.
In determining the actual recovery period, and other aspects of the funding strategy, to apply for any particular employer or employer grouping, the Administering Authority may take into account some or all of the following factors:
§ the size of the funding shortfall;
§ the business plans of the employer;
§ the assessment of the financial covenant of the Employer; and the security of future income streams
§ any contingent security available to the Fund or offered by the Employer such as guarantor or bond arrangements, charge over assets, etc.
§ length of expected period of participation in the Fund.
It
is acknowledged by the Administering Authority that, whilst posing
a relatively low risk to the Fund as a whole, it is possible that
some smaller employers may be faced with contributions that could
seriously affect their ability to function in the future. The
Administering Authority therefore, after specific agreement has
been obtained by Fund Officers from the North Yorkshire Pension
Fund Committee, would be willing to use its discretion to negotiate
an evidence based affordable level of contributions for the
organisation for the three years 20203/20236. Any application of this
option is at the ultimate discretion of the Administering Authority
and will only be considered after the provision of the appropriate
evidence and on the basis that it is not inconsistent with the
requirements to set employer contributions so as to ensure the
solvency and long-term cost efficiency of the
NYPF.
The Primary Contribution Rate (Future Service Contribution Rate)
In addition to any contributions required to rectify a shortfall of assets below the funding target, contributions will be required to meet the cost of future accrual of benefits for members after the valuation date (the “primary rate”). The method and assumptions for assessing these contributions are set out in Appendix 1.
Amending of contributions between triennial valuations
The Administering Authority may also amend contributions between valuations as permitted by Regulations 64 and 64A. Further details of the Administering Authority's policy in relation to Regulation 64A is set out in the Admissions and Terminations Funding Policy.
Pre-payment of contributions
The Administering Authority may, after considering the advice of the Fund Actuary, permitparticular employers to pay contributions earlyas a lump sum that would otherwise be payable over the following year (or a longer period not exceeding three years). An appropriate discount, as determined by the Fund Actuary, would be applied to the contributions to reflect the early payment. Atrue-up adjustment may be required if the early payment of contributions based on an estimated payroll results in lower contributions being paid into the Fund(after allowing for the discount) than would otherwise have been the case.
6. Link to Investment Policy set out in the Investment Strategy Statement
In assessing the value of the NYPF’s liabilities in the valuation, allowance is made for a long-term investment return assumption as set out below, taking into account the investment strategy adopted by the NYPF, as set out in the ISS.
It is not possible to construct a portfolio of investments which produces a stream of income exactly matching the expected liability outgo. However, it is possible to construct a portfolio which closely matches expected future benefit payments and represents the least risk investment position. Such a portfolio would consist of a mixture of long-term index-linked and fixed interest gilts. Investment of the NYPF’s assets in line with the least risk portfolio would minimise fluctuations in the NYPF’s ongoing funding level between successive actuarial valuations.
Departure from a least risk investment strategy, in particular to include equity type investments, gives the prospect that out-performance by the assets will, over time, reduce the contribution requirements. The funding target might in practice therefore be achieved by a range of combinations of funding plan, investment strategy and investment performance.
The current benchmark investment strategy, as set out in the ISS dated July 2021, is:
|
Asset Class (Summary) |
% |
|
Equities |
50 |
|
Infrastructure |
10 |
|
Property |
7.5 |
|
Private Credit |
5 |
|
Multi Asset Credit |
5 |
|
Corporate Bonds |
7.5 |
|
Government Bonds |
15 |
|
TOTAL |
100 |
The funding strategy adopted for the 2021 investment strategy review was based on an assumed long-term investment return assumption of 4.0% per annum. This is below the Administering Authority's view of the best estimate long-term return assumption of 5.6% as at the date of the investment strategy review.
Bespoke Investment Strategy for individual employers
The Investment Strategy adopted by NYPF is determined for the Fund as a whole. This Strategy takes into account the characteristics of NYPF as a whole, and therefore those of the constituent employers as an aggregated entity - it does not seek to distinguish between the individual liability profiles of different employers. The Strategy adopted to date, as reflected in the current ISS, is to invest a significant proportion of the assets in equities. Such investments offer a higher expected return, but also carry a higher level of risk.
NYPF is prepared to consider offering any employer the opportunity to adopt a lower risk Bespoke Investment Strategy (e.g. 100% government bonds). However, to the extent that any Bespoke Investment Strategy will necessitate different investment return assumptions to those used by the Actuary for NYPF overall, there may be a consequential material impact on the contribution rate calculated for that employer.
In addition, if an employer opts for a Bespoke Investment Strategy, NYPF reserves the right to determine the most appropriate way of arranging for the investment of the relevant share of the assets according to that Bespoke Strategy. Employers should be aware that they would be required to meet any costs associated with the design and implementation of a Bespoke Investment Strategy
7. Identification of Risks and Counter Measures
The funding of defined benefits is by its nature uncertain. Funding of the NYPF is based on both financial and demographic assumptions. These assumptions are specified in the Appendices and the actuarial valuation report. When actual experience is not in line with the assumptions adopted a surplus or shortfall will emerge at the next actuarial assessment and will require a subsequent contribution adjustment to bring the funding back into line with the target.
The Administering Authority has been advised by the actuary that the greatest risk to the NYPF’s funding is the investment risk inherent in the predominantly equity (or return seeking) based strategy, so that actual asset performance between successive valuations could diverge significantly from the overall performance assumed in the long term.
The Administering Authority keeps, and regularly reviews, a risk register to identify and monitor the risks to the Fund and will, wherever possible, take appropriate action to limit the impact of these both before and after they emerge.
What are the Risks?
Whilst the activity of managing the Fund exposes the Administering Authority to a wide range of risks, those most likely to impact on the funding strategy are investment risk, liability risk, liquidity/maturity risk, regulatory/compliance risk, employer risk and governance risk.
The risk of investments not performing (income) or increasing in value (growth) as forecast. Examples of specific risks would be:
– assets not delivering the required return (for whatever reason, including manager
underperformance)
– systemic risk with the possibility of interlinked and simultaneous financial market volatility
– insufficient funds to meet liabilities as they fall due
– inadequate, inappropriate or incomplete investment and actuarial advice is taken and acted upon
– counterparty failure
The specific risks associated with assets and asset classes are:
– equities – industry, country, size and stock risks
– fixed income - yield curve, credit risks, duration risks and market risks
– alternative assets – liquidity risks, property risk, alpha risk
– money market – credit risk and liquidity risk
– currency risk
– macroeconomic risks
The Fund mitigates these risks through diversification, permitting investment in a wide variety of markets and assets, and through the use of specialist managers with differing mandates.
The majority of the Fund’s investments are in pooled investment vehicles and the Fund is therefore directly exposed to credit risk in relation to the instruments it holds in the pooled investment vehicles. Direct credit risk arising from pooled investment vehicles is mitigated by the underlying assets of the pooled arrangements being ring-fenced from the pooled manager, the regulatory environments in which the pooled managers operate and diversification of investments amongst a number of pooled arrangements. The Committee carries out due diligence checks on the appointment of new pooled investment managers and on an ongoing basis monitors any changes to the operating environment of the pooled manager.
In
addition, the Fund holds assets in the LGPS pooling arrangement
with Border to Coast Pension Partnership (‘BCPP’) and
will transition further assets to BCPP in the future. Through this
arrangement the Fund is exposed to the risk of failing to
transition effectively to new pooling arrangements resulting in
poorer value for money; lower investment returns; and inability to
effectively execute investment strategy.”
Employer risk
Those risks
that arise from the ever-changing mix of employers, from short-term
and ceasing employers, and the potential for orphaned liabilities
and/or a shortfall in payments where employers are unable to meet
their obligations to the Scheme. The response to
the COVID-19 pandemic is a specific current risk which may have adverse
consequences in relation to employers' finances and their ability
to make contributions. The Administering Authority monitors
employer payments and expects employers to engage with the Fund
where their financial circumstances have changed, noting that
contributions can be reviewed between formal valuations if the
conditions in Regulation 64A and the terms of the Administering
Authority's policy as set out in the Admissions and Terminations
Funding Policy are met.
The Administering Authority maintains a knowledge base on its employers, their basis of participation and their legal status (e.g. charities, companies limited by guarantee, group/subsidiary arrangements) and uses this information to inform the FSS.
The Administering Authority monitors the active membership of closed employers and considers what action to take when the number of active members falls below 10, such as commissioning a valuation under Regulation 64(4).
The
Administering Authority commissioned the Fund Actuary to carry out
a high level risk analysis of employers in the Fund to assist the
Administering Authority in setting the funding strategy for
employers at the 2019 2022 valuation of the
Fund.
Liquidity/Maturity risk
This is the risk of a reduction in cash flows into the Fund, or an increase in cash flows out of the Fund, or both, which can be linked to changes in the membership and, in particular, a shift in the balance from contributing members to members drawing their pensions. Changes within the public sector and to the LGPS itself may affect the maturity profile of the LGPS and have potential cash flow implications. For example,
– The implications of budget cuts and headcount reductions could reduce the active (contributing) membership and increase the number of pensioners through early retirements;
– An increased emphasis on outsourcing and other alternative models for service delivery may result in falling active membership (e.g. where new admissions are closed),
– Public sector reorganisations may lead to a transfer of responsibility between different public sector bodies, (e.g. to bodies which do not participate in the LGPS),
– Scheme changes and higher member contributions in particular may lead to increased opt-outs;
The Administering Authority seeks to maintain regular contact with employers to mitigate against the risk of unexpected or unforeseen changes in maturity leading to cashflow or liquidity issues.
Climate Risk
The systemic risks posed by climate change and the policies implemented to tackle them will fundamentally change economic, political and social systems and the global financial system. They will impact every asset class, sector, industry and market in varying ways and at different times, creating both risks and opportunities for investors. The Administering Authority keeps the effect of climate change on future investment returns and life expectancy under review and will commission advice from the Fund actuary on the potential effect on funding as required. [At the 2022 valuation the Fund actuary will undertake scenario analysis to assess the resilience of the funding strategy to climate change risk over an agreed period.]
Liability risk
The main risks include inflation, life expectancy and other demographic changes, and interest rate and pay inflation, which will all impact upon future liabilities.
The Administering Authority will ensure that the Fund Actuary investigates these matters at each valuation and reports on developments. The Administering Authority will agree with the Fund Actuary any changes which are necessary to the assumptions underlying the measure of solvency to allow for observed or anticipated changes.
The Fund Actuary will also provide quarterly funding updates to assist the Administering Authority in its monitoring of the financial liability risks. The Administering Authority will, as far as practical, monitor changes in the age profile of the Fund membership early retirements, redundancies and ill health early retirements and, if any changes are considered to be material, ask the Fund Actuary to report on their effect on the funding position.
If
significant liability changes become apparent between valuations,
the Administering Authority will notify all participating employers
of the anticipated impact on costs that will emerge at the next
valuation and consider whether to require the review of the bonds that are in place for
Admission Bodies.
Where it appears likely to the Administering Authority that for an employer the amount of the liabilities arising or likely to arise has changed significantly since the last valuation, the Administering Authority may consider revising an employer's contributions as permitted by Regulation 64A.
Regulatory and compliance risk
Regulatory risks to the scheme arise from changes to general and LGPS specific regulations, taxation, national changes to pension requirements, or employment law.
The Administering Authority keeps abreast of all the changes to the LGPS and will normally respond to consultations on matters which have an impact on the administration of the Fund.
There are a number of uncertainties associated with the benefit structure at the current time including:
§
How Government will address the issues of GMP
indexation and equalisation for the LGPS beyond expiry of the
current interim solution from 6 April 2021.
§
The
timing and detail of any regulations in
relation to the remedy to compensate members for illegal age
discriminationfull scale of the
costs following the outcome of the
McCloud/Sargeant cases.
For the purposes of the 2022 valuation, an approximate employer specific allowance will be made in respect of the McCloud remedy based upon a high-level analysis of the employer’s fund membership. Members’ benefits will be valued as required by relevant legislation as in force as at 31 March 2022, except for the following assumptions:
i) It will be assumed that the current underpin (which only applies to those members within 10 years of their Normal Pension Age at 31 March 2012) will be revised and apply to all members who were active in the scheme on or before 31 March 2012 and who join the 2014 Scheme without a disqualifying service gap.
ii) The period of protection will apply from 1 April 2014 to 31 March 2022 but will cease when a member leaves active service or reaches their final salary scheme normal retirement age (whichever is sooner).
iii) Where a member remains in active service beyond 31 March 2022, the comparison of their benefits will be based on their final salary when they leave the LGPS or when they reach their final salary scheme normal retirement age (whichever is sooner).
iv) Underpin protection will apply to qualifying members who leave active membership of the LGPS with an immediate or deferred entitlement to a pension.
v) The underpin will consider when members take their benefits, so they can be assured they are getting the higher benefit.
§
The
outcome of the cost management process as at 31 March 2016 and 31 March
2020., noting the agreement reached in relation to
the Scheme Advisory Board (SAB) process for member contributions to
be reduced and benefits enhanced to achieve an additional cost of
0.9%, before the process was paused due to the McCloud/Sargeant
ruling
§ The Goodwin case in which an Employment Tribunal ruled (in relation to the Teachers' Pension Scheme) that the less favourable provisions for survivor's benefits of a female member in an opposite sex marriage compared to a female in a same sex marriage or civil partnership amounts to direct discrimination on grounds of sexual orientation. Following a written ministerial statement by the chief secretary to the Treasury on 20 July 2020 it is expected that changes will be made to the LGPS Regulations to reflect the ruling, but no changes have yet been proposed.
In
determining how these uncertainties should be allowed for in
employer contributions the Administering Authority will have regard
to guidance issued by the SAB, taking account of the Fund Actuary's
advice. The Fund's policy for allowing for the possible cost of the
McCloud judgement / Cost Management process and GMP equalisation / indexation
for new employers joining the Fund and employers exiting the Fund
is set out in the Fund's Admissions
and Terminations Funding Policy.
In
addition, a consultation document was issued by MHCLG (now DLUHC) entitled "Local
Government Pension Scheme: Changes to the Local Valuation Cycle and
the Management of Employer Risk" dated May 2019. This included a
proposal to change the LGPS local fund valuations to quadrennial
cycles. The Administering Authority will have regard to any changes
in the Regulations as a result of this consultation and consider
any actions required at the 2019 2022 valuation or subsequent
valuations, taking account of the Fund Actuary's advice.
8. Monitoring and Review
The Administering Authority has taken advice from the actuary in preparing this Statement, and has also consulted with employing organisations.
A full review of this Statement will occur no less frequently than every three years, to coincide with completion of a full actuarial valuation. Any review will take account of then current economic conditions and will also reflect any legislative changes.
The Administering Authority will monitor the progress of the funding strategy between full actuarial valuations. If considered appropriate, the funding strategy will be reviewed (other than as part of the triennial valuation process), for example:
§ if there has been significant market volatility
§ if there have been significant changes to the NYPF membership and/or maturity profile
§ if there have been changes to the number, type or individual circumstances of any of the employing authorities to such an extent that they impact on the funding strategy e.g. closure to new entrants
§ where employers wish to make additional (voluntary) contributions to the NYPF
§ if there has been a material change in the affordability of contributions and/or employer financial covenant strength
§ to reflect significant changes to the benefit structure / Regulations
APPENDIX 1
North Yorkshire County Council
as Administering Authority for the North Yorkshire Pension Fund
Actuarial
Valuation as at 31 March 202219
Method and assumptions used in calculating the funding target
Risk Based Approach
The Administering Authority adopts a risk based approach to funding strategy. In particular the discount rate (for most employers) has been set on the basis of the assessed likelihood of meeting the funding objectives. The Administering Authority has considered 3 key decisions in setting the discount rate:
– the long-term Solvency Target (i.e. the funding objective - where the Administering Authority wants the Fund to get to);
– the Trajectory Period (how quickly the Administering Authority wants the Fund to get there), and
– the Probability of Funding Success (how likely the Administering Authority wants it to be now that the Fund will actually achieve the Solvency Target by the end of the Trajectory Period).
These three choices, supported by complex (stochastic) risk modelling carried out by the Fund Actuary, define the discount rate (investment return assumption) to be adopted and, by extension, the appropriate employer contributions payable. Together they measure the riskiness (and hence also the degree of prudence) of the funding strategy. These are considered in more detail below.
Solvency Target
The Administering Authority's primary aim is the long-term solvency of the Fund. Accordingly, employers’ contributions will be set to ensure that 100% of the liabilities can be met over the long term using appropriate actuarial assumptions.
The Administering Authority believes that its funding strategy will ensure the solvency of the Fund because employers collectively have the financial capacity to increase employer contributions should future circumstances require, in order to continue to target a funding level of 100%.
For most Scheduled Bodies and Admission Bodies where a Scheme Employer of sound covenant has agreed to subsume the Admission Body's assets and liabilities in the NYPF following its exit, the Solvency Target is set:
– at a level advised by the Fund Actuary as a prudent long-term funding objective for the Fund to achieve at the end of the Trajectory Period,
– based on continued investment in a mix of growth and matching assets intended to deliver a return above the rate of increases to pensions and pension accounts (CPI).
As
at 31 March 202219 the long-term rate of CPI is
assumed to be 2% p.a. and a prudent long-term investment return of
2% above CPI is assumed.
This then
defines the Solvency Target. As at 31 March 2019 2022 this equates to a solvency
discount rate of 4% p.a.
For Admission Bodies and other bodies whose liabilities are expected to be orphaned following cessation, a more prudent approach will be taken. The Solvency Target will be set by considering the valuation basis which would be adopted should the body leave the Fund. For most such bodies, the Solvency Target will be set commensurate with assumed investment in Government bonds after exit.
Probability of Funding Success
The Administering Authority considers funding success to have been achieved if the Fund, at the end of the Trajectory Period, has achieved the Solvency Target. The Probability of Funding Success is the assessed chance of this happening based on asset-liability modelling carried out by the Fund Actuary.
With effect
from 31 March 202219 the discount rate, and hence the
overall required level of employer contributions, has been set such
that the Fund Actuary estimates there is an 80% chance that the Fund would
reach or exceed its Solvency Target after 25 years (the Trajectory
Period)
Funding Target
The Funding Target is the amount of assets which the Fund needs to hold at the valuation date to pay the liabilities at that date as indicated by the chosen valuation method and assumptions and the valuation data. The valuation calculations, including the primary contribution rates and adjustment for the surplus or deficiency, set the level of contributions payable and dictate the chance of achieving the Solvency Target at the end of the Trajectory Period. The key assumptions used for assessing the Funding Target are summarised below.
Consistent with the aim of enabling the primary rate of employers' contribution rates to be kept as nearly constant as possible, contribution rates are set by use of the Projected Unit valuation method for most employers. The Projected Unit method is used in the actuarial valuation to determine the cost of benefits accruing to the Fund as a whole and for employers who continue to admit new members. This means that the contribution rate is derived as the cost of benefits accruing to employee members over the year following the valuation date expressed as a percentage of members’ pensionable pay over that period. The future service rate will be stable if the profile of the membership (age, gender etc) is stable.
For employers who no longer admit new members, the Attained Age valuation method is normally used. This means that the contribution rate is derived as the average cost of benefits accruing to members over the period until they die, leave the Fund or retire. This approach should lead to more stable employer contribution rates than adoption of the Projected Unit method for closed employers.
Funding Targets and assumptions regarding future investment strategy
For Scheduled Bodies whose participation in the Fund is considered by the Administering Authority to be indefinite and Admission Bodies with a subsumption commitment from such Scheduled Bodies, the Administering Authority assumes indefinite investment in a broad range of assets of higher risk than risk free assets.
Academies are currently considered to qualify as indefinite participants in the Fund with full taxpayer backing, as they have a guarantee from the Department for Education. The liabilities and future service (primary) contributions will therefore generally be calculated using the scheduled and subsumption body funding target. However, this guarantee is subject to review and where the Administering Authority believes the guarantee is no longer sufficient to cover the risks posed by the number of academies in the Fund, the Administering Authority will review the approach taken to set the funding target for academies and any admission bodies for which an academy provides a subsumption commitment as well as the default approach taken to the notional assets transferred to academies upon conversion.
For other Scheduled Bodies, in particular the Colleges and Universities whose participation is not considered to be indefinite, the Administering Authority may without limitation, take into account the following factors when setting the funding target for such bodies:
– the type/group of the employer
– the business plans of the employer;
– an assessment of the financial covenant of the employer;
– any contingent security available to the Fund or offered by the employer such as a guarantor or bond arrangements, charge over assets, etc.
For
Admission Bodies and other bodies whose liabilities are expected to
be orphaned on exit (with the exception of the colleges and universities where a
different approach will be adopted at the 202219 valuation as set out below), the
Administering Authority will have regard to the potential for
participation to cease (or for the body to have no contributing
members), the potential timing of such exit, and any likely change
in notional or actual investment strategy as regards the assets
held in respect of the body's liabilities at the date of exit (i.e.
whether the liabilities will become 'orphaned' or a guarantor
exists to subsume the notional assets and liabilities).
Colleges and Universities
Due
to concerns about the covenant strength of Colleges and
Universities, the Administering Authority will, from the 2019 valuation
onwards,has adopted a Funding Target for Colleges
and Universities which reflects the Administering Authority's views
of the sector. This includes the two universities that are
Admission Bodies in the Fund where there is no subsumption
commitment, but which continue to admit new members to the
Fund.
Whilst the Administering Authority will adopt a general approach of assuming indefinite investment in a broad range of assets of higher risk than Government bonds, a reduction will be made to the discount rate used for the long-term secure scheduled bodies to reflect concerns about the covenant strength of Colleges and Universities. This is known as the Intermediate Funding Target.
The
Administering Authority may also adopt the Intermediate Funding
Target for other employers where there are concerns about the
covenant strength of the employer. At the 2019 2022 valuation this decision will
be informed by the high-level risk analysis of employers within the
Fund carried out by the Fund Actuary. The Administering
Authority will generally also adopt the Intermediate Funding Target
for admission bodies that have an appropriate subsumption
commitment provided by a suitable Scheme employer that is subject
to the intermediate funding target.
At the 2022 valuation the Administering
Authority will adopt a dual approach to the discount rate used for
the Intermediate Funding Target. The standard position will be that Colleges and
Universitiesy will have their liabilities
valued on the
Intermediate funding target (standard approach). It will be
open to each College and University to satisfy the Fund as to
its covenant
strength which may allow a move to the Intermediate funding target
(strong covenant approach). This would result in lower contribution
requirements.
The Fund is deemed to be fully funded when the assets are equal to or greater than 100% of the Funding Target, where the funding target is assessed based on the sum of the appropriate funding targets across all the employers/groups of employers.
Financial assumptions
Investment return (discount rate)
The
discount rate for the 202219 valuation is as
follows:
§
4.2% p.a. for
employers where the Scheduled and
subsumption body / subsumption funding target
applies
§ 3.85% p.a. for employers where the Intermediate funding target (strong covenant approach) applies
§
3.68% p.a. for employers where the
Intermediate funding target (standard
approach) applies
§
3.63% in service (equivalent to the yield on long-dated fixed
interest gilts at a duration appropriate for the Fund's liabilities
plus an asset out-performance assumption of 23% p.a.) and
1.60.8% left service, service (which is intended to be equivalent to
the yield on long-dated fixed interest gilts at the valuation date
but which has, in the interests of affordability and stability of
employer contributions, been increased by 0.23% p.a. to take account of market
expectations of future increases in gilt yields after the valuation
date), for employers where the Ongoing
orphan funding target applies.
Inflation (Consumer Prices Index)
The CPI inflation assumption is taken to be the long-term (30 year) Capital Market Assumption at the valuation date as produced by Aon Solutions UK Limited. In formulating the Capital Market Assumption, both consensus forecasts and the inflation risk premium are considered.
For the 2022 valuation we will
increase past service liabilities for the Scheduled
and
subsumption body funding
target by 105% will be increased to allow for short-term the 6
months of high inflation not reflected in the Capital
Market Assumptions.
Salary increases
The assumption for real salary increases (salary increases in excess of price inflation) in the long term will be determined by an allowance of 1.25% p.a. over the inflation assumption as described above plus an allowance for promotional increases.
Pension increases/Indexation of CARE benefits
Increases to pensions are assumed to be in line with the inflation (CPI) assumption described above. This is modified appropriately to reflect any benefits which are not fully indexed in line with the CPI (e.g. Guaranteed Minimum Pensions in respect of service prior to April 1997 for members who had a State Pension Age before 6 April 2016).
Demographic assumptions
Post-retirement Mortality
Base Rates
Normal Health:
Standard SAPS S23N tables, year of birth base
rates, adjusted by a scaling factor.
Ill-health:
Standard SAPS S23 Ill-health tables, year of birth
base rates adjusted by a scaling factor.
Scaling Factors
Rates adjusted by scaling factors as dictated by Fund experience
Active and Deferred Males (normal
health)
105115%
Active and Deferred Females (normal
health)
115105%
Pensioner Males (normal health) 105%
Pensioner Females (normal health) 105%
Activeand Deferred Males
(ill-health)
105115%
Active Females
(ill-health)
115140%
Deferred Females (ill-health) 135%
Pensioner Males (ill-health) 110%
Pensioner Females (ill-health) 130%
Appropriatescaling factors will also apply to contingent dependants of members in the above categories.
Future improvement to base rates
An
allowance for improvements in line with the CMI 202118, for men or women as
appropriate, with a long term rate of improvement of 1.50% p.a.,
sk of 7.05 and parameter A of 0.50.
Pre-retirement mortality
Males:
As for normal health retirements but with a 5540% scaling factor
Females:
As for normal health retirements but with a 5530% scaling factor
Retirement age
The assumed retirement age is dependent on the Group of the member and also the member's Rule of 85 age (Ro85 age).
|
Category of member |
Assumed age at retirement |
|
Group 2 members (taper protected) |
|
|
Group 3 members (Ro85 age = 60) |
64 |
|
Group 3 members (Ro85 age > 60) |
65 |
|
Group 4 members (Joiners pre 1 April 2014) |
65 |
|
Group 4 members (Joiners post 31 March 2014 |
State Pension Age |
Any
part of a member’s' pension payable from a later age
than the assumed retirement age will assumed to be reduced using
factors issued by GAD / DLUHC MHCLG in force on the valuation
date.
Withdrawals
Allowance is made for withdrawals from service. On withdrawal, members are assumed to leave a deferred pension in the Fund and are not assumed to exercise their option to take a transfer value.
Retirement due to ill health
Allowance is made for retirements due to ill health. Proportions assumed to fall into the different benefit tiers applicable after 1 April 2008 are:
Tier 1 (upper
tier)
9085%
Tier 2 (middle
tier)
510%
Tier 3 (lower tier) 5%
Family details
A
man widower is assumed to be
3 1 years older than his spouse, civil
partner or cohabiteefemale pensioners. A
woman widow is assumed to be 3 years
younger than her spouse, civil partner or cohabiteemale pensioners.
8085% of male pensioners / non-pensioners are assumed to be
married / cohabitating at age 65
/ retirement or earlier death.
8075% of female pensioners / non-pensioners are assumed to be
married / cohabitating at age 65 / retirement
or earlier death.
Commutation
Each member is
assumed to take cash such that the total cash received (including
statutory 3N/80 lump sum) is 7580% of the permitted maximum amount
permitted of their past service pension entitlements.
Take up of 50/50 scheme
All members are assumed to remain in the scheme they are in at the date of the valuation.
Promotional salary increases
Allowance is made for age-related promotional increases.
Expenses
0.56% of Pensionable Pay added to the
cost of future benefit accrual.
Summary
of key whole Fund assumptions used for calculating funding target
and cost of future accrual (the “primary contribution
rate”) for the 202219 actuarial valuation
|
Investment return / Discount Rate (secure scheduled bodies and admission bodies with a subsumption commitment from a secure scheduled body) |
4.2% p.a. |
|
|
|
Investment return / Discount Rate (intermediate funding target (strong covenant approach)) Investment return / Discount Rate (intermediate funding target (standard approach)) |
3.85% p.a.
3.6 |
|
|
Investment Return / Discount Rate for orphan bodies In service Left service |
0.8 |
|
|
CPI price inflation |
2.3 |
|
|
Long Term Salary increases |
3.55 |
|
|
Pension increases/indexation of CARE benefits |
2.3 |
* plus 510% uplift to
past service liabilities on the Scheduled and subsumption body
funding target to take account of higher short-term
inflation
Please note that the discount rate shown above
was that used as at the actuarial valuation as at 31 March 2019.
The Fund has subsequentially carried out an investment strategy
review which was based on a discount rate assumption of 4.0% p.a.
as at the date of carrying out the investment strategy
review.