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LPP responds to MHCLG consultation about moving to a four year valuation cycle

31st July 2019,

LPP responded by way of a written submission to the MHCLG open consultation on proposed changes to the ‘LGPS local valuation cycle and management of employer risk’. 

The consultation covers the following areas:

  • amendments to the local fund valuations from the current 3 year (triennial) to a 4-year (quadrennial) cycle
  • a number of measures aimed at mitigating the risks of moving from a triennial to a quadrennial cycle
  • proposals for flexibility on exit payments
  • proposals for further policy changes to exit credits
  • proposals for changes to the employers required to offer local government pension scheme membership

The proposals relate to the Scheme in England and Wales.

In our submission we argue that it may not necessarily be the case that a proposed move to four yearly valuation cycles will result in either greater stability of contribution rates or reduced costs for employers.  Less frequent monitoring of contributions and costs may result in a reduction in both contribution stability and levels of governance, with less flexibility to adjust to changes in circumstances and a greater step change at each quadrennial valuation date than would otherwise have been the case. 
Other issues LPP believe should be considered before moving funds to a quadrennial cycle include:

  • the ability of employers to budget effectively for changes in contributions every four rather than every three years 
  • the potential for increased costs (governance, administrative and actuarial) associated with interim valuation processes running alongside the formal quadrennial rather than triennial valuations
  • the potential for reduced cost in performing fewer valuations (provided there are no interim valuations required or the costs associated with these are not significant) will need to be balanced with the corresponding increased potential for greater step change in employer contributions and the potential for reduced contribution stability if these are only reviewed every four rather than every three years
  • although the move to quadrennial valuations would align with the valuation cycle for unfunded public sector schemes, we are unsure about the clear rationale for doing this. This cycle would then be longer than the triennial timeframe in which funded private sector schemes operate, for example 
  • the potential impact on exercises secondary to the formal valuation but that use valuation data and cashflows, for example accounting disclosures and investment strategy reviews, will need to be considered. We can potentially see many FRS /IAS issues emerging, based on the typical ‘roll forward’ calculations performed. This may lead to further audit scrutiny and challenge in the future.

More at: LGPS local valuation cycle and management of employer risk

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