LONDON, (18 December 2017) – Aon plc (NSYE:AON) has said that the Local Government Pension Scheme (LGPS) faces six key challenges in 2018.
Karen McWilliam, partner and head of Public Sector Benefits Consultancy at Aon, said:
“2017 has been an extremely busy year for public sector pension schemes and for those in the LGPS in particular. And there isn’t likely to be much let up as they approach the end of the year, given the 3 January deadline for the new MIFID II requirements relating to the classification of administering authorities.
“Most schemes will already be deep in their business planning for 2018/19, including budgeting and assessing what services can be outsourced for greater efficiency. But there are many other topics that will go into business planning – we have looked at those and see six top priorities.”
Asset pooling: Significant progress has been made towards pooling in 2017. However, to meet next year’s 1 April deadline, the focus needs to be continued during the first quarter of 2018. The way in which existing assets are moved to the new structures and how these continue to evolve to meet ongoing requirements also needs to be considered.
Administering authorities also have the continuing challenge of ensuring that the right governance arrangements are in place, and that everyone understands their responsibilities. This way decisions can be made by the appropriate person(s), with an appropriate level of transparency, and appropriate oversight of the Operators' investments by administering authorities.
ESG: Environmental and social governance considerations are a growing concern for investors globally.
Colin Cartwright, partner and investment consultant at Aon, said:
"The LGPS has been a big advocate of responsible investment in the UK – but now is the time for schemes to fully integrate their approaches into their strategic decision making processes.”
Data quality/improvements: This is high on the agenda of the Pensions Regulator and has to be a focus of attention for schemes. They need to look closely at all administration matters and particularly on identifying data gaps/inaccuracies in relation to all fund employers and all categories of scheme members. They then need to put a clear data improvement plan in place. Any opportunity to clear up historical data, such as old scheme part-time hours and annual CARE pay should be taken. This will enable administration teams to work more efficiently and to avoid the need to continually check and resolve historical data issues.
Ensuring accuracy of data reduces the need for the actuary to have to make assumptions about the data when valuing the liabilities. In the current financial climate, employers and administering authorities need to do all they can to avoid unnecessary margins in the liabilities - and hence the risk of paying higher than needed pension contributions.
Closely linked to this is being prepared for the new General Data Protection Regulations (GDPR) and also understanding and mitigating risks relating to cybercrime.
Employer risk: The number of employers within the LGPS continues to grow and financial challenges continue to affect all sectors, from higher/further education and housing associations and charities, to local authorities and other taxpayer backed bodies. This means that a key priority for 2018 is the need to ensure employer risk and funding are adequately assessed and embedded within governance structures and the risk register - as well as reflected in a scheme’s funding strategy.
Administering authorities need to look ahead to the 2019 valuations and to ensure that there is sufficient time for appropriate analysis, consultation and engagement with employers well before the valuation date. It is possible that regulatory change may result from the Scheme Advisory Board’s review of the challenges facing ‘tier 3’ bodies such as housing associations and charities, a project on which Aon has been appointed to advise by the SAB, led by Alison Murray, partner and head of Public Sector Actuarial Consultancy at Aon.
Alison Murray said:
“This is another reason for administering authorities to look more closely at their own employers and to ensure they have the right strategies in place. Aon has led the way in differentiating between employers as a core part of funding and contribution strategy, and we are pleased that others are now starting to follow suit.”
Appropriate resource and expertise: Given the radical changes to the LGPS in recent years, a fundamental review of pension fund resources should be a priority if it has not already taken place. Do all administering authorities have the appropriate amount and level of expertise in place to deliver a good quality and compliant service to its stakeholders, particularly given the ongoing challenges that they face?
Legislative change: In some ways this is business as usual – there has been no shortage of legislative change in recent years. But schemes need to remain agile and capable of responding to legislative developments. In 2018 this could include Fair Deal, the Exit Cap and any changes to the funding requirements relating to academies (and tier 3 too although that might be in 2019, as will any cost management changes).
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020 3755 1618
Notes to Editors
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