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
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
-0.1% p.a. inflation
-0.5% p.a. salary increases
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.