The time is now! LGPS Bulletin 53

With rampant inflation, rising interest rates and a cost-of-living crisis it’s very easy to think around every corner is something ever more negative. However, the upward trajectory of interest rates has created an unexpected opportunity for employers participating in LGPS.

The graph below shows gilt yields and inflation since 1^st January 2021.

20-year annualised inflation peaked at about 4.1% at the end of March 2022 just when most employers were getting their FRS results.  However, corporate bond yields (and gilt yields) had also increased - the higher the corporate bond yield, the lower the value placed on liabilities.  The increase in corporate bond yields more than offset the increase in inflation, and as such many employers would have seen an improvement in their accounting position.

This trend has continued.  However, from April 2022 onwards you’ll see the gap between inflation and gilt yields narrowing as gilt yields have continued to rise while inflation has come down from its peak, reflecting an expectation of a future reduction as a result of higher interest rates. Most, if not all employers, will be unaware of the impact.

Participants in LGPS have seen exit debts at record highs over the past couple of years which has meant many organisations have been trapped in schemes unable to afford to exit. These market changes however will have had a very material impact on exit debts as can be seen from the table below.

In this, admittedly simple example, the debt that would be due from the employer has reduced by over 60%. Clearly the actual deficit will depend upon each employers’ individual circumstances and the specific performance of the LGPS Fund they participate in, but the results do clearly show the trend. The assumptions used to calculate exit debts in August 22 are now more in line with the assumptions used for FRS calculations at 31 March 2022.

If employers are considering an exit from an LGPS they really should be looking at their position at the moment as they need to question if these market conditions are likely to persist indefinitely. The Bank of England’s Monetary Policy Committee meet again on the 15^th September 2022 and the expectation is that we could have a further interest rate increase however further increases will be less likely if and when inflation comes under control.

However, if employers are considering exiting a Scheme this is rarely achieved over a period of less than 6 months so if these underlying market conditions are likely to be a temporary phenomenon, then employers need to begin to examine their options now.

Employers in England, Wales and Northern Ireland should be getting their updated actuarial valuations as at 31 March 2022 in the next few months and this would seem to present an ideal opportunity to review their options, especially given the figures demonstrated above highlight that even after only 6 months these results will likely materially differ from the current position.