Archived decisions

Agenda item: 13

HAMPSHIRE COUNTY COUNCIL

Decision Report

1. Executive summary

1.1. The purpose of this report is to update the Panel with the progress made on the admission bodies action plan developed to mitigate and plan for the risks of admission bodies leaving the Pension Fund without being able to pay their deficit.

2. Background

2.1. The Pension Fund is exposed to the risk of community admission bodies (AB) leaving the Scheme without being able to pay any associated deficit costs. A model that quantified the impact of this risk was shared with the Panel in July 2009.

2.2. The results of the model were categorised into three risk groups:

· documentation - the state of existing admission agreements and employer awareness of the potential exit costs

· affordability - additional costs for the remaining employers in the event of an AB employer defaulting

· investment - the Fund's responsibility to invest appropriately for the needs of the employers.

2.3. The main conclusion of the report was to ask the scheduled bodies (ie, the local authorities) to underwrite the affordability risk through the use of a notional investment strategy for AB. This would mean on exit, the AB would pay for any deficit associated with a lower risk investment strategy, with the scheduled employers funding the difference between the actual and the notional investment strategy.

2.4. The next step was for the Fund Actuary to develop an action plan which established a `flight path' for community ABs who wish to move to a less volatile investment strategy. This action plan would also provide for a comprehensive communication programme with AB employers to raise awareness and understanding.

2.5. The Communities and Local Government (CLG) consultation, `Delivering Affordability, Viability and Fairness', which closed on 30 September 2009, considered possible actions to counter the funding risks faced by all Local Government Pension Scheme (LGPS) employers, including the introduction of financing plans. The Fund Actuary needs to incorporate the outcomes of this consultation in the AB action plan as it will affect key decisions, such as:

· use of underwriting

· subsumption concept (explained in paragraph 5.10)

· guarantors and bonds

· allocation of investment returns.

2.6. The results of the consultation were expected by the end of October 2009 but have not yet been published. The Actuary has therefore been unable to complete the action plan, which instead will be shared in full at the next Panel meeting. In the meantime, Pensions Services have continued to work with AB employers to mitigate the risks highlighted by the risk model.

2.7. Pending the results of the consultation, the Fund Actuary is continuing to develop the action plan for community ABs, including the `flight path' to migrate ABs to a less volatile funding strategy together with a communication strategy for ensuring these bodies are fully aware of the risks they face.

3. Notional investment strategy

3.1. The key step taken following the results of the risk assessment model has been to get the agreement of the scheduled bodies to underwrite the risk posed by potential exit from the Fund of the community ABs.

3.2. The Fund currently has a single investment strategy based on a level of risk that reflects the long-term position of most employers in the Fund. However, community ABs may only be in the Fund for a relatively short period and the short-term volatility of the investment strategy may leave these employers with a large deficit payment if they leave the Fund.

3.3. The scheduled bodies have agreed to underwrite the risks faced by community ABs by allowing them to have a less volatile, notional investment strategy. No actual change will take place but should an AB leave the Fund, the closing valuation will be done as if a lower risk investment strategy had been followed for that employer. The scheduled bodies would then pick up any difference between actual and notional investment returns.

4. Interim measures

4.1. Whilst the formal action plan is being developed, Pensions Services have set in place some interim measures for helping community AB employers:

· re-visiting existing admission agreements

· raising awareness with AB employers

· enabling AB employers to leave the Fund without defaulting

· ensuring new employers are fully aware of the scope of their responsibilities.

4.2. These measures will be incorporated into the Fund Actuary's action plan.

Re-visiting existing agreements

4.3. AB employers are admitted to the Fund by way of a legally binding admission agreement. The current LGPS regulations prescribe the terms of these agreements and the elements they must contain. Many of the older agreements pre-date these regulations and are silent on a number of key matters including termination and guarantees.

4.4. Furthermore, changes to the organisations themselves over time (for example incorporation) give rise to doubts as to the continuing validity of the existing agreements for the AB employers.

4.5. Following discussions with the Fund's legal advisers, a group of AB employers were invited to consider drawing up new agreements under the current Regulations. This requires their funding body (usually a precepting authority) to be a guarantor party to that agreement. Several AB employers are currently pursuing this option.

Raising awareness with AB employers

4.6. A significant amount of work has been undertaken to inform ABs of their potential liability and to improve their level of understanding of the Scheme rules, and in particular how the rules apply to those AB employers seeking to exit the Fund.

4.7. Many employers receive FRS17 figures for inclusion with their annual accounts. FRS17 is an estimate of the pension liability for an employer, calculated on an on-going basis (i.e. assuming that contributions will continue). A closure valuation, such as an employer would have if they left the Fund, is calculated on the basis that all contributions will stop and therefore is often two or three times larger than the FRS17 figure.

4.8. Work has been carried out with employers to raise their awareness in two areas: firstly on the existence of a liability on exit (many employers were unaware of any pension liability beyond the monthly contribution) and then on the difference between the FRS17 figures they receive and the potential size of a closure valuation.

4.9. Although much of the communication work has been to educate employers who do not intend to leave the Fund, part of this work has involved working with ABs and their local authority guarantors to find acceptable mechanisms to enable those exits to be both orderly and affordable.

Enabling affordable exits from the Fund

4.10. Following internal re-organisation aimed at reducing their costs, several community AB employers have sought assistance in finding an way to leave the Fund, without incurring an unaffordable deficit payment. This has been achieved with the co-operation of the local authority guarantors by way of an actuarial device known as `subsumption'. Under subsumption, the local authority absorbs the small number of members from the AB employer into its own pool of pension liabilities, without cost to either party. Subsumption has been successfully carried out for two AB employers.

4.11. The risk assessment revealed that a number of admission agreements had ceased without the closing valuation required by the regulations taking place. This has caused some issues with employers wanting to leave the Fund being aware that others in similar circumstances have not yet paid any deficit contribution.

4.12. A decision must be made as to whether retrospective closing valuations should now be calculated for these bodies so that all employers can be treated consistently. It is expected that the action plan will address this issue.

New employers in the Fund

4.13. Due to the high costs of the Scheme, no new community AB employers have joined the Fund in recent years although several enquiries have been received. Pensions Services have a named point of contact for AB employers and to provide prospective employers with full information about the Scheme and their responsibilities.

4.14. All the new transferee AB employers that have been admitted to the Fund since the appointment of the Technical Officer have done so using comprehensive admission agreements. These employers have also signed up to a Service Level Agreement with Pensions Services that sets out the responsibilities of both parties.

5. Next steps

5.1. The Fund Actuary will produce an action plan containing the flight plan for getting AB employers to a less volatile funding position, and which consolidates the existing communication measures into a comprehensive strategy.

5.2. Pensions Services will continue to inform and educate employers as to their responsibilities as Scheme employers.

6. Conclusions

6.1. The Fund Actuary will develop an action plan for mitigating the risks posed to the Fund of admission bodies leaving without being able to pay their deficit.

6.2. This action plan is dependent on the outcomes of the CLG consultation on the affordability of the LGPS and so will be shared at the next Panel meeting.

7. Recommendation

7.1. That the Panel notes the progress on preparing the action plan for admission bodies and that the County Treasurer reports to the Panel when the action plan has been finalised.

CORPORATE OR LEGAL INFORMATION:

Links to the Corporate Strategy

Other Significant Links

IMPACT ASSESSMENTS:

1. Equalities Impact Assessment:

1.1 Equality objectives are not considered to be adversely affected by the proposals in this report.

2. Impact on Crime and Disorder:

1.2 The proposals in this report are not considered to have any direct impact on the prevention of crime.

3. Climate Change:

a) How does what is being proposed impact on our carbon footprint / energy consumption?

No specific impact.

b) How does what is being proposed consider the need to adapt to climate change, and be resilient to its longer term impacts?

No specific impact.