Bulletin 55 – The time is definitely now!
In August 2022 I published a Bulletin “The time is now” highlighting that there was an opportunity for charities participating in LGPS to exit their schemes on a very affordable basis, however this ‘window’ was likely to be short-lived.
Experience has definitely supported this view, as over the recent months I have witnessed many charity clients be in a position to exit their LGPS participation with hugely reduced deficits and even in a material number of cases substantial surpluses. As a result, the charities have witnessed in flows of cash they’d never anticipated and very significant reductions in future pension costs. All very welcome given the uncertain times we currently face.
The graph below shows gilt yields and inflation since 1st January 2021.
However over January 2022 we witnessed a fall of about 10% in gilt yields since the end of December and about 25% since the failed Truss/Kwarteng experiment in October 2022. As gilt yields fall pension liabilities rise and as a result of this, we could be seeing surpluses reduce and potentially become deficits again or underlying deficits increase.
Expectations are that UK inflation will peak in quarter 2 2023 and we could well see inflation fall rapidly in the 2nd half of the year. If this is the case, we are likely to see associated falls in interest rates which will impact on UK gilt yields. Proportionately these falls in yields are likely to be greater than improvements in long-term inflation resulting in increases in liabilities and associated deficits, so the ‘window’ of opportunity could be closing for many charities.
The further we get in to 2023 the much less certain the future position is and given any change of membership could take anywhere from 2 months to 6 months to achieve I would urge charities participating in LGPS to urgently examine their position now to identify what current options may exist as any delay could mean some options are removed or become much less palatable.