Agenda item

At the time of the last tri-annual valuation of the Local Government Pension Scheme the Fire Authority had a funding deficit of £5.8m. This deficit was being paid off over the agreed deficit recovery period, 19 years, at a cost of approx. £200k-£300k per annum.  Members had agreed to utilise in-year underspends in 2014/15 and 2015/16 to pay off this deficit, setting aside £5.2m to do so, as this would reduce any future deficit recovery costs once the outcome of the next valuation in 2016 was agreed. Although it was noted that historically the level of deficit for the scheme as a whole had increased at each valuation, as liabilities had grown at a faster rate than assets, it was recognised that at the time of the valuation there was no guarantee that a new deficit would not exist.

Whole Scheme Valuation

The 2016 valuation had been published and this showed a marked improvement to the scheme as a whole, assets had grown significantly whilst liabilities had only increased marginally, which was completely out of kilter with historic trends.

Asset values had increased significantly due to investment returns performing better than forecast.  Liabilities had remained broadly static due to changes in actual pay and pensions inflation and changing assumptions; the basis of calculations was:-

·        pension increases had been limited to CPI;

·        pay inflation had been lower than anticipated;

·        life expectancy projections had been updated and whilst they had increased since the last valuation they had not increased by the forecasted amount;

·        the basis of assessing liabilities had been changed this year moving away from the link to gilts and moving to a link to CPI (had this not been the case the reduction in gilt yields would have resulted in a far greater liability).

Lancashire Fire Authority Fund

The Authority’s future service rate had increased from 12.8% to 14.7%, an increase of 1.9% which, based on the current budgeted wage bill, equated to £0.1m additional cost.

The Authority’s funding position had moved from a deficit of £5.8m to a surplus of £4.3m, this reflected the overall scheme changes highlighted above, and the additional contributions paid into the fund.

It was noted that contributions paid, offset by benefits accrued, accounted for £5.4m of the reduction (this was the monies set aside to pay off the 2013 deficit of £5.8m) the remainder of the reduction was due to investments generating £3.3m more returns than forecast with the balance, £1.4m, relating to the net impact of changing assumptions.

All of the above indicated the extent of volatility that the valuation was subject to, and the difficulty in making medium term predictions.  It was noted that the surplus was ring fenced for the Authority, it could not be used by others, and it would earn a return in line with the whole fund, which historically far outstripped the normal return.  Depending on what decision was made it would be available to offset any future increases that might occur when future revaluations took place.

Options

Based on this the Authority needed to pay the new employer contribution rate of 14.7%, an increase of 1.9%, which, based on our current budgeted wage bill, equated to £0.6m an additional cost of £0.1m.

As the fund was now in surplus there was no deficit to pay off, resulting in a saving of £0.2m, which was already reflected in future budgets.

In terms of the surplus on the scheme the Authority had the following options:-

·        leave the surplus in situ, to offset any future changes;

·        drawdown all of the surplus over the 16 year recovery period, £0.3m per annum (this would still leave approx. £3.3m as a surplus at the next valuation, all other things being equal);

·        drawdown the surplus to offset all of the future service pension contributions, £0.6m per annum (this would still leave approx. £2.3m as a surplus at the next valuation, all other things being equal, but we would need scheme approval to do so);

·        drawdown part of the surplus over the 16 year recovery period, one option being to draw down a sum equal to the increase in future service contribution, i.e. £0.1m (this would still leave approx. £4.0m as a surplus at the next valuation, all other things being equal).

It was noted that the actuary had also confirmed that it was possible to review the extent of any drawdown on an annual basis, subject to scheme approval.

In response to a question raised by County Councillor O’Toole, the Director of Corporate Services confirmed that the surplus was ring-fenced for the Authority, any draw-down would go back into the revenue budget and there was no change with the move from a Lancashire to a Lancashire / London fund.

Following discussion, given the decision on how to treat the surplus formed part of a wider discussion on the budget and council tax options it was agreed that this item be brought back for reconsideration at the next meeting scheduled for 20 February 2017.

RESOLVED: – That the Authority agreed to reconsider this item at its budget setting meeting on 20 February 2017.