Agenda item

Report of the Executive Director Corporate Services

This report considers the contribution strategy for the Council as the major employer in the Pension Fund, amongst 27 other much smaller employers. It considers the current stabilisation strategy that is applied to the Council (rates move within a window capped by +1% and a floor of -1%) and presents analysis from the Fund’s actuary for seven different contribution strategies to be applied from 1 April 2023 in 4 different models.

This report has an appendix, which contains information exempt within the meaning of Schedule 12A to the Local Government Act 1972 and is not for publication. The appendix has, therefore, been circulated to Committee Members only.

If the Committee wishes to discuss the contents of a closed exempt appendix it may pass the proposed resolution identified at the end of the agenda to exclude members of the public and the press from the proceedings for that discussion.

Consideration was given to a report of the Executive Director Corporate Services regarding the contribution strategy for the Council as the major employer in the Pension Fund, amongst 27 other much smaller employers.

The Committee also considered the current stabilisation strategy that was applied to the Council and an analysis from Hymans Robertson (the Fund’s actuary) for seven different contribution strategies to be applied from 1^st April 2023 in four different models.

The Council’s Head of Treasury and Financial Services introduced the report and Barry Dodds from Hymans Robertson who was also present at the meeting summarised the key points contained in the valuation report.

It was highlighted that

·       Camden Council was the largest and main employer in the fund.

·       The Council was different from the other employers in that it had tax raising powers, strong revenue resources and was able to operate a stabilisation policy.

·       The Funding Strategy Statement governed how employers in the fund were managed.

·       The Committee’s role was to consider whether the contribution strategy as set out in the report was acceptable in order to ensure that the Pension Fund achieved its aim of being fully funded and being able to finance its liabilities under the scheme.

It was noted that Hymans had modelled seven contribution strategies under four different scenarios, as set out below:

·               Freeze contributions in 22/23 forever

·               Freeze contributions in 22/23 for the next 3-year triennial valuation cycle and then revert to stabilisation (+/-1%)

·               Freeze contributions in 22/23 for 3 years and then stabilisation plus a cap of 32.5%

·               Step down contributions by 1% in each of the next three years and then stabilisation

·               Step up contributions by 1% in each of the next three years and then stabilisation

·               Reduce contributions by £10m over three years and then stabilisation

·               Reduce contributions by £15m over three years and then stabilisation

The four scenarios were

·       Baseline – taking the 2019 triennial valuation assumptions

·       Checking the outcomes in 14 years’ time (to show progression since last time)

·       Asset shock impacts (a reduction in assets of 10%)

·       Including changes to the Discount rate (set at 2% and agreed at the July committee)

Hymans had set out that all contribution strategies would be acceptable. It was noted that it was important that the valuation continued with the level of prudence built into previous triennial valuations. However, in light of the higher contributions paid over the last triennial valuation cycle compared to other LGPS Funds, the Council, as the main employer in the Fund, could maintain a similar level of prudence and likelihood of success and have a similar outcome in the worst 5% of outcomes by reducing rates by 1% in each year. This balanced prudence with affordability.

Based on this analysis the recommendation to the Committee was to reduce contributions by £10m over the next three-year triennial valuation period and view this as a continuation of the prudence embedded in the 2019 and previous valuations, whilst allowing the Council to reduce rates slightly to fall back into line with other LGPS funds and their contribution rates.

The Fund’s actuary pointed out that as part of climate change modelling it had tested the robustness of the funding strategy against potential impacts on three climate change scenarios: green revolution, delayed transition and head in the sand. In all modelled scenarios the distribution of key variables such as inflation and returns widened which demonstrated increased volatility in an increasingly uncertain world. The modelling showed that the likelihood of success was still above 70% which, it was noted was within the acceptable minimum threshold.

In response to questions, it was noted that:

·       The modelling was very much long-term modelling, so there was likely to be volatility in the short term. There was flexibility in the regulations which allowed for contribution rates to be reviewed between valuations. Contribution rates could also be fixed in the short term and reviewed every three years.

·       With regards to the Climate Change scenarios, the green revolution in the short term would have the greatest disruption. The various scenarios would increase volatility at different periods of time, it was envisaged however, that at the end of the 17-year period it would not have a big impact on the Pension Fund.

·       The Council contribution rate had a stabilisation mechanism which allowed the rate to go up or down by 1% of payroll each year. It was how much the Council paid as a percentage of the Council’s payroll for those members of the scheme.

·       The Government Actuary Department took the results of each valuation produced by all the funds in England and Wales, converted them all on to the same assumptions so each fund could be compared on a like for like basis.

·       Although the current economic climate had changed the initial starting position because the modelling had been done over a 17-year period with 5,000 different scenarios with a variation it would negate the results.

The Head of Treasury Management and Financial Services informed the Committee that the Council had been very prudent, had always accepted the assumptions from the Fund Actuary and had never tried to overstate where the Council might be or what it might need. The Council had always been governed by the prudency of its assumptions and if the strategy adopted was not working it could be reviewed.

The Chair commented that he had been assured by the advice provided from the Funding Actuary and Council Officers and was comfortable that the strategy could be reviewed in 3 years’ time and fell within the threshold of 70% success and was minded to agree with the recommendations.

On being put to the vote it was, with 4 votes in favour, 0 against and 1 abstention, it was

RESOLVED –

THAT the Fund accepts the Councils proposal to reduce contributions by £10m in total over the next three financial years (23/24 – 25/26).

          ACTION BY: Executive Director Corporate Services