Funding

In line with other UK pension funds, each LGPS fund undertakes a local actuarial valuation every three years. The last triennial valuation of the LGPS local assets and liabilities was at 31st March 2022 (see below) and the next one will be as at 31st March 2025. The results of the 2022 valuations will be made available on this website. There are also separate four-yearly scheme-level valuations that take place across public service pensions schemes including the LGPS, but these are separately conducted and reported and not considered here.

2022 Actuarial Valuation

The 2022 fund valuation results are available and are included here for reference. Together with Barnett Waddingham the Board has carried out an overall analysis of the 2022 valuations using LGPS fund data at 31st March 2022. Headline results and a comparison with 2019 is set out below. The 2022 valuation results were used to set employer contribution rates from 31st March 2023. It is important to note that each fund will have used different assumptions which makes direct comparisons across funds difficult. The overall analysis therefore is based on standardised information as set out in the valuation dashboard for each Fund (agreed between the Fund actuaries and the Government Actuary’s Department).

As at 31st March 2022, the analysis of the 2022 valuations reported assets of £361.1bn and liabilities on local funding assumptions of £339.0bn, i.e. a surplus of £22.1bn and a funding level of 107%. This is an overall improvement compared to the position in 2019 which showed assets of £285.8bn and liabilities of £291.7bn i.e. a deficit of £5.9bn and a funding level of 98%.

By way of comparison as at 31st March 2016, the funding level of the 5,131 direct benefit occupational pension schemes within the Pension Protection Fund index was 111.4% (on a insurance buyout basis, which is different from the LGPS actuarial valuation methodology). As at 31st March 2022 the University Superannuation Scheme funding level was 98%.

*See valuation 2013, 2016 and 2019 pages for fund values used in calculations

2022 LGPS funding level £ billion

Funding level* 2010 79% 2013 79% 2016 85% 2019 98% 2022 107%

*Figures restated in 2019 & 2022 valuations. 

Development of LGPS funding position

Following the 2016 and 2019 valuations, the Board published two summary reports. A summary version outlined the key findings of the valuations and provided some brief background. A more detailed version gives a fuller overview of the 2019 valuations and provided some wider context as to a) how employer contribution rates are calculated during valuations, and b) how individual fund valuations relate to the Board cost management process. The Board will publish a summary report of the 2022 valuations shortly.­­­­­

Aggregated information

We have the following aggregated information from the annual report and audited accounts of the LGPS funds as at 31st March 2022 showing the development of the LGPS. Importantly, this notes that active membership is maintained and contribution payments continue to exceed benefit payments which is consistent with the scheme remaining open to new entrants.

Income and Expenditure year to 31st March 2022

Life Expectancy Index

Working closely with the LGPS Scheme Advisory Board, Club Vita have created a LGPS Life Expectancy Index to communicate the evolution of life expectancy amongst LGPS pensioners in a simple and informative way. The Index also provides the Board with an early warning signal of material changes in longevity that might impact the affordability of benefits.

In addition to the LGPS Life Expectancy Index, Club Vita provides valuable longevity analytics to the majority of UK LGPS Funds. This enables Funds and their advisers to understand the evolution of Fund specific longevity. It also means assumptions used to value liabilities at the triennial valuation can be selected to reflect the specific demographic profile of the Fund’s membership. Funds which don’t currently receive Club Vita longevity analytics are invited to contact Jill Gallagher, Head of Pensions UK at Club Vita. 

This year’s Life Expectancy Index focuses on mortality data for LGPS pensioners up to 2021. The period since the beginning of the pandemic, in March 2020, has seen large numbers of excess deaths in the UK population and, despite DB pensioners being somewhat insulated from pandemic era excess mortality, a drop in life expectancy at age 65 is evident in the Index in 2020. In 2021, the Index shows a bounce-back towards pre-pandemic life expectancies, however the additional deaths experienced during the year means that this is lower than what we might have otherwise expected 2021 life expectancies to be.

The Life Expectancy Index is presented as single data points for men and women considering only death rates in the particular year. Given the diverse membership and long-term focus of the LGPS, it is important to consider wider longevity trends and the impact they could have on the future life expectancy of the different types of individuals participating in the LGPS.

For the latest pandemic analysis, please visit the Club Vita website.

Changes in observed longevity

The chart below demonstrates the annual progression of the LGPS Life Expectancy Index between 1993 and 2021 for male and female LGPS pensioners in England and Wales (E&W). It measures the age that members are expected to live to after reaching the age of 65, based on death rates in that year (referred to as period life expectancy).

Pandemic period

Deaths amongst the UK population rose rapidly over April and May 2020 as the pandemic arrived and before lockdowns began to limit the spread of the virus. Following a resurgence in COVID-19 deaths in the last few months of 2020, the death count for the year was around 83,000 higher than is expected. Given a typical year sees UK deaths of around 600,000, the 83,000 figure illustrates the impact of the pandemic, despite the significant social distancing measures put in place.

The Delta and Omicron variants spread throughout 2021 and COVID-19 deaths replaced the usual winter “mortality spike”. By the end of 2021, the death count for the year was around 60,000 higher amongst the general population than is typical.

The short-term impact on Fund liabilities of the additional COVID-19 deaths over 2020 and 2021, in isolation, is likely to be a relatively modest reduction of less than 0.5% for the majority of Funds. This is primarily a result of deaths generally being concentrated amongst older pensioners, who tend to hold a relatively small share of each Fund’s liabilities.

Excess mortality during 2022

2022 was another unusual year for UK mortality. We again saw more deaths in the UK than expected under pre-pandemic projections, with these ‘excess deaths’ observed in the summer months and through to the end of the year. However, the number of deaths mentioning COVID-19 was relatively low. 2022 longevity insights for LGPS pensioners will be available in our next index.

LGPS Funds vs general population 

In general, members of defined benefit pension schemes, including members of LGPS Funds, have been somewhat insulated from some of the population health effects we’ve observed in recent years. Whilst we observed decreases in period life expectancy in 2020 at a national level, local ‘pockets’ of COVID-19 infections and deaths led to regional variations in mortality rates, which could be linked to socio-economic variation. As such, it’s important for LGPS Funds to understand the socio-economic profile and regional concentration of their Fund and understand what this could mean for future life expectancies - using population statistics for assumption setting, and risk management, could be potentially misleading. No two LGPS Funds will be impacted to the same extent and in fact, no two employers within a Fund will see the same mortality impact in relation to the pandemic.

This phenomenon is not unique to the pandemic, longevity trends in general (in particular since 2011) have not affected all pensioners in the same way.  Club Vita has recently refreshed its research into how longevity trends are experienced in different socio-economic groups, based on data for the years 2003 to 2020[1]. The latest summary results for males are included in the table below:

Source: Vita Segments longevity trend analysis²

In line with the LGPS life expectancy index chart above, the first line of the table shows that the rate of mortality improvements is lower in the 2014-2019 period (comparing the change from 2013-2015 to 2018-2020) for the E&W population as a whole versus the previous 5-year period.

The bottom three lines show mortality improvements for the “Comfortable”, “Making-Do” and “Hard-Pressed” sub-groups of the Club Vita dataset of UK DB pensioners. Essentially, these groups divide the Club Vita DB pensioner data into high, medium and low socio-economic groups, broadly equal in size. Although all groups follow the same general trend as is observed in the E&W population, we can see that:

• the Hard-Pressed group has experienced a greater fall in improvements in the 2014-2019 period than those in Comfortable and Making-Do groups.
• the Making-Do group saw slightly higher improvements than the Comfortable group.

Applying the E&W population trend to a group of pensioners could see future life expectancy underestimated for pensioners in all socio-economic groups in the 2014-2019 period. Underestimating the life expectancy (and therefore the associated liabilities) of higher socio-economic groups is most problematic, as we generally see the majority of a Fund’s liability concentrated on these higher socio-economic groups.

[1] Initial analysis is presented in the following paper: PLSA and Club Vita (2017): Longevity trends – Does one size fit all?

[2] The numbers in the table are calculated in line with the principles as set out in the above paper, with the exception of the following:

• A 3-averaging approach has now been introduced to remove some year-on-year volatility. For example, the improvements for the period 2014-2019 are based on data for the years 2013-2020, looking at the change from 2013-2015 to 2018-2020.
• We continue to review the data used for the calibration to ensure it is appropriate for the purpose.

Consequences for LGPS funds

What should LGPS Funds (and their actuaries) do about this as they consider the risks facing the Fund in the run up to their next valuations? They will typically take a longer-term view, seeking to base their funding assumptions for longevity on a broader view of how longevity has been changing rather than reacting to the most recent experience alone.

Given the volatile experience to date and the evidence on how different individuals are being impacted by the COVID-19 pandemic, understanding the socio-economic profile and regional concentration of the Fund membership becomes important, together with a view on whether general drivers of mortality improvements and the pandemic will affect different groups in different ways. This will inform both the current rate of longevity improvement amongst Fund members and views on how that will change over the next 2 or 3 decades. These long-term effects of the COVID-19 pandemic have the potential to generate a much more material impact on liabilities.

Some LGPS Funds (and their actuaries) use scenario analysis to stress test their funding strategy. Club Vita have considered the longer-term drivers of change and have calibrated four longevity scenarios that Funds can use to help understand the long-term longevity risk introduced by the pandemic and to effectively ‘stress test’ their funding strategies as part of their overall risk management framework.

The pandemic is not the only risk event that Funds need to consider when exploring future longevity scenarios. Club Vita have prepared a paper on how climate change and resource constraints might impact UK longevity. This introduces three climate change longevity scenarios which some LGPS Funds have used to explore the effects of climate change on their funding plans.

Further details on these longevity scenarios can be found on the Club Vita website.

Consequences for LGPS Funds

What should LGPS Funds (and their Actuaries) do about this as they consider the risks facing the Fund in the run up to their next valuations? They will typically take a longer term view, seeking to base their funding assumptions for longevity on a broader view of how longevity has been changing rather than baking in the most recent experience alone.

Given the volatile experience to date and the evidence on how different individuals are being impacted by the COVID-19 pandemic, understanding the socio-economic profile and regional concentration of the Fund membership becomes important, together with a view on whether general drivers of mortality improvements and the pandemic will affect different groups in different ways. These will inform both the current rate of longevity improvement amongst Fund members and views on how that will change over the next 2 or 3 decades.

If nothing else, the recent longevity turbulence we have been exposed to in the past year should serve as a reminder that LGPS Funds (and their Actuaries) should continue to monitor longevity trends and seek to better understand the drivers of changes in life expectancy.

These scenarios, together with considerations of other risks such as investment risk, can help pension funds introduce climate change and pandemic considerations into their risk management framework.

Methodology

The LGPS Life Expectancy Index tracks the life expectancy of E&W LGPS pensioners. The methodology ensures the index results are objective and reflect the experience of E&W LGPS members.

The index is based on period life expectancy from age 65. For each year this is a measure of how long you expect to make pension payments to an average member based on death rates in that year.

This approach to measuring life expectancy uses only observable, verifiable data (with data on circa 2/3rds of E&W LGPS Funds used by the index) and does not allow for any subjective assumptions about how life expectancies will change in the future.

The index allows changes in life expectancy from year to year, and trends in life expectancy emerging over a number of years, to be clearly identifiable.

Reliances and Limitations

• The life expectancy values shown in this chart have been provided by Club Vita to the Advisory Board for inclusion in the Scheme Annual Report. Whilst they can be reproduced, they should not be relied upon or used for any other purpose without the written permission of Club Vita (UK) LLP.
• Life expectancies are based on the experience of English and Welsh LGPS Funds that have provided data to Club Vita as at February 2023.
• The life expectancy shown for a particular year is the period life expectancy measured at age 65 - this is based on the exposure and deaths occurring during that year, so does not make any allowance for changes in longevity before or after that year.
• To be clear, the life expectancies shown have been calculated from the crude mortality rates of E&W LGPS pensioners.
• The life expectancy of an individual LGPS pensioner will depend on many factors, including age, gender, health, wealth, future changes in mortality, etc. and the figures shown here are not intended to represent or predict the life expectancy of any one individual member.
• This report has been prepared in line with the principles of the Financial Reporting Council’s Technical Actuarial Standard (TAS) 100: Principles for Technical Actuarial Work.