Articles - Key priorities for the LGPS in 2021


Most people will be glad to see the back of 2020, however, it seems the first weeks of 2021 have been just as challenging, as we face the ongoing trauma of the coronavirus pandemic, and in our more specific world of the Local Government Pension Scheme. While we stay safe at home, we look ahead to the priorities for the LGPS in 2021.

 By Catherine McFadyen, Head of LGPS Consulting, David Walker, Chief Investment Officer and Ian Colvin, Head of LGPS Benefits Consulting from Hymans Robertson
  
 Actuarial
  
 Employer Flexibilities
 Legislation introducing further funding flexibilities for funds and employers was introduced in England & Wales on 23 September 2020, and SAB guidance on this is currently out for consultation. It gives Funds more options in managing employer exits (including entering into arrangements which extend beyond the employer’s last active member leaving the Fund) and reviewing employer contribution rates between valuations when employer circumstances change. We expect to see engagement from employers on both topics.
  
 Action: This is a good prompt to review cessation or exit policies and to consider how employer funding and covenant is monitored between valuations, particularly for employers with shorter time horizons.
  
 Funding Strategy
 As English & Welsh Funds enter the pre-valuation year, there are funding strategy projects which can be tackled now to avoid everything being left to 2022. These might include data improvement plans and employer engagement, reviews of pooling and guarantor arrangements, employer covenant reviews, review of cessation bases and orphaned liabilities, reviews of employer investment strategies as well as understanding the impact of COVID on longevity experience and assumptions.
  
 We also await the results of the cost management and S13 valuations which Funds may need to react to over the course of 2021.
  
 Action: In partnership with your actuarial team, identify any funding strategy projects that can be carried out over the next year and decide on when is best to schedule the work. Scottish Funds may have issues raised by employers during the 2020 valuation.
  
 Good Governance
 We are looking forward to the conclusion of the English & Welsh Scheme Advisory Board’s ‘Good Governance’ project. The anticipated key changes to governance arrangements are the appointment of a single named ‘senior LGPS officer’ with responsibility for delivery of the fund’s activities, the publication of an annual governance compliance statement and biennial independent governance reviews.
  
 Action: The proposed changes have been well trailed, and it would be a good idea to review the Fund’s governance arrangements against the recommendations and identify areas that may need work before the implementation date.
  
 Investment
  
 Sustainable investment and funding outcomes
 Despite the significant volatility in 2020 most funds are in strong positions and have performed well throughout the crisis. 2021 will provide an opportunity to reassess whether strategies are aligned to deliver sustainable investment and funding outcomes. This includes any changes that were agreed as part of strategy reviews alongside, or following, the latest actuarial valuation.
  
 Action: Funds should review their investment and funding objectives and ensure the balance of risk across their strategies is delivering the required returns efficiently and cost effectively in the current market environment.
  
 Climate risk measurement and monitoring
 Climate risk is a systemic factor which impacts all pension funds and their investments. Understanding the climate risk exposures within your fund will help engagement and inform decision making. It is also likely to be under greater scrutiny and be subject to new regulatory requirements such as the Taskforce for Climate related Financial Disclosures framework.
  
 Action: Define appropriate metrics and monitoring processes to improve the rigour and consistency with which climate risk factors can be assessed and keep your Fund ahead of regulatory change.
  
 Responsible investment objectives and beliefs
 Before considering strategic changes it’s important to understand your Fund or Committee’s objectives and beliefs particularly on responsible investment. Informed by suitable monitoring, objectives and beliefs help provide a consistent framework to review how investments are structured and implemented. Any investment decision, particularly in relation to responsible investment, should be consistent with these objectives and beliefs in order to achieve better outcomes.
  
 Action: Review or develop responsible investment objectives and beliefs and apply them consistently to decision making processes.
  
 Governance, Administration & Projects
  
 McCloud
 While 2021 might see some of the big names of last year exit the limelight (or maybe not), one name that will continue to resonate through this year is that of McCloud.
  
 A project of this scale needs careful planning and funds should already be analysing their data, identifying the necessary resource and putting in place a robust plan for delivery. Employers should already be aware of what is expected from them and be planning how they will deliver it. 2021 is expected to be ‘moving year’ for McCloud!
  
 Action: The next few months should see funds receiving and validating data from employers in order to update the records of affected members. This will need to be managed alongside the governance aspects of the project such as keeping committee and pension boards informed and managing the risks inherent in a project of this nature. This phase of the project needs to be managed in such a way that the move to the next stage (recalculations and possible restitution) is as smooth as possible.
  
 Exit Payment cap and reform
 One of last year’s breakout stars for English & Welsh funds was the £95k cap and exit reform, which this year promises storylines full of political intrigue and courtroom drama.
  
 At the moment we still find ourselves in a position where funds and employers are placed in the unenviable position of choosing whether to comply with the LGPS Regulations or the £95k cap. It is hoped that the MHCLG regulations, consulted on late last year, will arrive in a format that at least solves that problem. However, the outcome of the various legal challenges being brought against the government means that the picture may well become more blurred before it fully resolves.
  
 Action: English & Welsh Funds should have in place procedures to ensure that they can calculate pension strain using factors that are not age discriminatory, that can manage the interim position in a way that complies with GDPR and provides some protection if they are challenged legally.
  
 Once the new position on exit reform becomes known, funds will need a way to calculate and communicate the full range of options available to members, bearing in mind that administration systems may take some time to catch up. A sizeable administration and governance challenge for 2021.
  
 Returning to the office
 The phrase of 2020 was surely “you’re on mute”. And it’s one that a lot of us are hoping to hear a little less often once we can all return to the office. It’s likely though, that 2020 has fundamentally changed what we mean when we talk of “going to work”.
  
 Vaccine rollouts permitting, 2021 could see most of us settling into hybrid working patterns; seeking to retain some of the benefits of homeworking while enjoying the personal touch and creativity that can come from being in the same room as our colleagues.
  
 Action: 2021 may provide the opportunity to undertake a fundamental rethink about how LGPS funds operate. What is the best balance of home and office working both for the well-being of staff and the service offered to employers and scheme members?
  
 Now is the time to think about truly embedding a digital first approach so that staff can concentrate on the services that add the most value. Now is also the time to tackle any backlogs that may have built up over the last year or longer.
  
 A final action point, and one that really shouldn’t be overlooked, is to arrange that big night out we’ve all been looking forward to for so long.  

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