Agenda item

The Committee considered a report of the Director of Corporate Resources, the purpose of which was to request that the Committee approve the proposed assumptions, and to note employer risk used in the Leicestershire Local Government Pension Scheme (LGPS) valuation. A copy of the report marked ‘Agenda Item 8’ is filed with these minutes.

The Chairman welcomed Mr. Tom Hoare and Mr. Richard Warden from Hymans Robertson, the Pension Fund’s Actuary, to the meeting. They provided a presentation as part of this item. A copy of the presentation slides is filed with these minutes.

Arising from discussion, the following points were made:

1. A Member raised a query regarding whether the prudence guidance adequately accounted for unforeseen developments such as The McCloud remedy, the full implications of which remained uncertain. Officers responded that McCloud represented one of the most significant challenges faced by pension funds in recent years and continued to be a major administrative undertaking. While initial concerns focused on its potential impact on liabilities, the emphasis had since shifted to administrative impact. The process involved reviewing the benefits of every affected member, yet the financial impact on liabilities had proven to be less than 1%. McCloud was considered during the 2022 valuation and was being reassessed for the 2025 valuation.

2. Members were informed that future legislative changes, such as pooling, were expected to introduce further uncertainty. Prudence had been incorporated into investment risk assessments and included broader concerns such as inflation, geopolitical developments, and regulatory changes. Events such as McCloud, had contributed to the decision to increase the prudence level from 75% to 80%.

3. A Member questioned whether, given the Fund’s current funding level of 159%, increasing prudence from 75% to 80% was overly cautious. Officers clarified that the previous target was 100% funding during a deficit position. At the last valuation, the Fund entered surplus for the first time in several years, prompting the introduction of a 120% funding level target which includes a 20% buffer within the Funding Strategy Statement (FSS), which was considered a reasonable safeguard against market downturns. Officers acknowledged that excessive prudence could adversely affect employers. Once modelling results were received from Hymans, employer contribution rates would be reviewed, with the expectation that some rates might be reduced. Stabilised employers had already been modelled and were anticipated to benefit from reduced rates effective April 2026.

4. It was noted that the current discount rate stood at 6%. A hypothetical reduction to 4.4%, as applied in the previous valuation, would significantly affect the funding level. Officers explained that, across the LGPS, the apparent improvement in funding was largely due to expectations of future returns rather than actual asset growth, and the LGPS sector remained in a similar position to that of 2022. Given current risks, particularly inflation, a cautious approach remained appropriate, but it was assumed a return of only 4.4% would be overly pessimistic.

5. A Member observed that universities were classified as high-risk employers due to the absence of a Department for Education (DfE) guarantor. Officers confirmed that they were actively engaging with high-risk employers to understand and mitigate potential pension risks to the Fund.

6. Each employer was assessed individually during the valuation cycle, which occurred every three years. Risk profiles might evolve over time due to various factors, such as changes in guarantor arrangements or financial stability. For example, an expanded DfE guarantor could reduce risk, while declining international student enrolment might increase it.

7. Where an employer was deemed to pose a higher risk, officers would initiate discussions to understand influencing factors and explore available securities, such as bonds, land, or buildings, measures which aimed to ensure the Fund’s ability to meet pension obligations, even in adverse scenarios. Officers acknowledged the challenges posed by employer contribution rates.

8. Officers confirmed that universities were likely to be considered higher risk in the current valuation compared to previous years, however, it was acknowledged that the sector was highly diverse, with some institutions facing significant challenges, while others might present lower risk than other organisations listed.

9. The risk rating process was applied across all employer groups, but individual employers also considered. For instance, academies which was comprised of approximately 75 employers, were each assessed separately, with some exhibiting higher risk than others.

10. Community admission bodies, typically older charitable organisations, also posed unique risks. Those employers often had fewer active members and a higher proportion of pensioners and deferred members, resulting in mature liabilities with limited incoming contributions. Additionally, their security arrangements could be less robust. Officers confirmed that all employers were evaluated on an individual basis.

RESOLVED:

That:

a)    The Pension Fund Valuation 2025 report and presentation be noted:

b)    The following valuation assumptions be approved:

c)     The valuation employer risk be noted.