With most charities in LGPS having to disclose their pension funding position in their accounts at 31 March 2020, the recent turmoil in the markets is likely to be causing concern, particularly for those with limited balance sheet surplus.
The FTSE 100 has fallen by over 30% since March 2019. While this does not directly reflect the impact on individual funds it is a good proxy for the change in growth assets over the year.
A ‘flight to safety’ will have increased the value of government bonds. However, a widening of credit spreads will have reduced the value of corporate bonds.
Overall, depending on the investment strategy employed by the fund, asset values may be down with Funds with very little hedging likely to see a significant fall in asset values.
The deficit recorded in your accounts also depends on the value placed on your liabilities, and at the moment there is some good news on that front. Widening credit spreads have increased corporate bond yields and they are now higher than they were in March 2019. Inflation has also fallen. Both of these factors will reduce the value places on liabilities.
At time of writing therefore charities may see an improvement in their position in comparison to last year. The position is highly volatile however and Is changing significantly every day.
If you are concerned about the figure likely to be placed on your balance sheet there are steps you can take to help manage this.
What is not universally known is that it is the Directors /Charity Trustees who have responsibility for setting the FRS disclosure assumptions and not the Fund actuary. You can therefore chose to use a different set of assumptions if those are more suitable for you and bearing in mind that one set of global assumptions issued by the Fund actuary can’t be specific to each employer, this is probably something worth considering, especially if your balance sheet position is important.
You may well be surprised by just how much of a difference small changes in the assumptions can make to your liabilities and therefore your deficit and balance sheet position.
I would therefore encourage employers already disclosing an LGPS pension liability to consider the assumptions used and whether or not they are appropriate.
The table below shows the potential impact of varying the assumptions used to calculate the FRS 102 liability. Please note this will vary for each scheme and the figures below are provided as an example only (based on a scheme with a duration of approximately 20 years).
|Change in assumption||Change in liability|
|+0.1% p.a. discount rate||-2%|
|-0.1% p.a. inflation||-2%|
|-0.5% p.a. salary increases||-1%|
Indicative results showing the impact on deficit and balance sheet position based on the above changes to the assumptions are shown below.
|‘Standard’ assumptions £000||Organisation specific assumptions £000|
So, for this illustrative example, a change of around 5% in the liabilities as in this case could reduce the deficit by around 18% and improve the balance sheet position by £150,000.
Therefore, you can see that for organisations participating in LGPS, it is well worth considering the use of bespoke assumptions, particularly if you are looking to manage your balance sheet. If you would like an indication of how changes could have impacted your 2019 disclosures, please let me know and we would be happy to provide these.
If you are looking to incorporate non standard assumptions, you need to consider this now as Funds usually require some advance notice that a different process will be used. We provide this service for many of our clients so don’t hesitate to contact us if you need more information.