Scottish LGPS Funds Briefing No 146

November 2006

Introduction

This briefing provides an overview of the Local Government Pension Scheme (LGPS) funds in Scotland following their triannual valuation in March 2005. It will also provide some background on issues such as how the funding values are calculated.

Background

The LGPS is a traditional final salary scheme where benefits are generally related to the member's length of scheme membership and pay during the final year of membership.

The LGPS prefunds its future liabilities by investing the contributions made by employers and employees. Pension benefits are paid out of those investments.

Although public sector pension policy follows a UK level framework, the regulation of the LGPS is the responsibility of the Scottish Administration.

There are eleven LGPS funds in Scotland which cover not only the 32 local authorities but also other employers including those in the further and higher education sector, community and voluntary groups as well as some Scottish Non Departmental Public Bodies such as SEPA, Scottish Water and the Care Commission.

In total, there are around 216,000 active members, 59,000 deferred members and around 124,000 pensioners within all the LGPS funds in Scotland.

Funding Values

The reported funding position of pension schemes is only a snap-shot at a given date, and the position moves with financial markets.

A pension fund's liability is the total value of its obligation to make payments to beneficiaries, both today and in the future. The liability is made up of a number of factors, some of which can be valued precisely and some of which must be estimated. For example, the number of current pensioners is known, but their life expectancies can only be estimated on the basis of experience.

The value of the pension liabilities will also depend on the discount rate used, which is sometimes taken as a proxy for anticipated future investment returns.

The value of pension liabilities is also increasing because of accounting changes. To comply with FRS 17 accounting rules, the discount rate for valuing the liabilities of funded schemes was reduced from 3.5 per cent to 2.4 per cent (in real terms) on 31 March 2005.

This reflects the lower investment return on quality bonds at that date, and has the effect of increasing the value of pension liabilities.

For the LGPS, the change to the discount rate meant that the average level of funding for the scheme fell from 89% at 31 March 2004 to about 76% at March 31 2005. This is despite an average growth in investment assets of 14% over the same period.

March 2005 Valuation

Three yearly valuations of funds at 31 March 2005 were finalised in February and March 2006. They measure fund liabilities against the assets and check the solvency of funds. These valuations recognise the funding strategies adopted by each fund and use them to value liabilities, on a different basis from FRS 17, and to set future contribution rates.

The valuations show funding levels higher than the reported FRS 17 valuations and they also show a decline in funding levels from the valuations at 31 March 2002. However, in comparison with LGPS funds in England and Wales (and very many private sector funds) the Scottish LGPS funds are relatively healthy.

Each fund has plans in place to increase their funding levels by March 2006. For instance, Strathclyde Pension Fund (which has 88,000 active members – almost 41% of all LGPS members in Scotland) is aiming to reach a funding value of 104% by March 2006.

It also has to be remembered that the funding valuations are merely a snapshot in time of the estimated liabilities and assets of each fund. The valuations also assume that all pension liabilities must be paid at the one time – in other words all members retiring on the date of valuation. It is unrealistic that everyone in the scheme will retire on the same day, live to the same age, and die on the same day, and this is the only way that the liabilities reported would become a real and meaningful figure.

Action for Branches

This briefing paper is intended to update members on the Local Government Pension Scheme in Scotland and to encourage debate within branches.

There will be a Pensions Seminar in the new year which will provide information which should be of interest to members and branches when considering the options for the new look LGPS.

Further Information

UNISON Scotland Pension Pages

http://www.unison-scotland.org.uk/pensions/index.html

UNISON Pension Pages

http://www.unison.org.uk/pensions/index.asp