Funding

In line with other UK public sector pension funds, the LGPS undergoes an actuarial valuation every three years. The last triennial valuation of the LGPS assets and liabilities was at 31st March 2019 (see below) and the next one will be as at 31st March 2022. The results will be made available on this website as soon as they are available.

2019 Actuarial Valuation

The 2019 valuation results are available and are included here for reference. The overall result of the 2019 valuation using LGPS fund data at 31st March 2019 with a comparison for 2016 is set out below. The 2019 valuation results were used to set contribution rates from 1st April 2020 to 31st March 2023. It is important to note that each fund will have used different assumptions, and whilst not directly comparable across funds, the aggregated total liabilities provides a prudent estimate for the scheme at the triennial valuation dates.

As at 31st March 2019, the total asset value of the Scheme was £290 billion, compared with £216 billion as at 31st March 2016. The liabilities totalled £296 billion in aggregate. The overall funding level was around 98%.

By way of comparison as at 31st March 2016, the funding level of the 5,450 direct benefit occupational pension schemes within the Pension Protection Fund index was 97.4% (on a insurance buyout basis, which is different from the LGPS actuarial valuation methodology). As at 31st March 2019 the University Superannuation Scheme funding level was 93%.

*See valuation 2010, 2013 and 2016 pages for fund values used in calculations

2019 LGPS funding level £ billion

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

Development of LGPS funding position

Following the 2013 and 2016 valuation, 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 2016 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.

Aggregated information

We have the following aggregated information from the annual report and audited accounts of the LGPS funds as at 31st March 2021 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 2021

Life Expectancy Index

Club Vita have developed an LGPS Life Expectancy Index to support the work of the LGPS Scheme Advisory Board. This Index will help support the communication of changing life expectancy in the LGPS to its scheme members. The Index will also provide the Board with longevity related information, including early warning of material changes in longevity that might impact on affordability of benefits.

This Life Expectancy Index focuses on a period life expectancy measure, analysing data up to and including 2020. As period life expectancy makes no allowance for any future changes in mortality rates, the inclusion of 2020 data will take account of the large number of COVID-19 related deaths but won’t consider any future changes to mortality levels that may be around the corner as we emerge from the pandemic. At this stage, the scales are finely balanced. We could see lower future longevity improvements as a result of negative longer term factors, such as future waves of the COVID-19 virus and the potential impact this might have on our economy and health service. However, on the other side of the coin, we could see positive factors dominate future improvements, such as the advancements of mRNA vaccine technology and its potential applications in cancer care.

We consider the impact of potential after-effects of the COVID-19 pandemic later in this paper.

Changes in observed longevity

The chart below demonstrates the annual progression of the LGPS Life Expectancy Index between 1993 and 2020 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.

Before 2020, the average rate of increase in life expectancy was around 2 years per decade for males and around 1.5 years per decade for females, although it has not increased uniformly over the period since 1993, with a slower rate of increase since 2011 reducing the average rate per decade.

We see a significant drop in life expectancy in 2020 compared to the values in 2019, a drop of 0.9 years and 0.5 years for males and females respectively, due to the higher death rate in that year. The mortality rate in 2020 was around 13.5% higher than we would have expected at the start of the year, for the population in England and Wales. The nearest comparison is 1963 when the number of deaths was around 4% higher than the underlying trend, in this case, caused by an influenza epidemic.

2020 was an exceptional year and a tragic one for many families in our communities. However, when thinking about pension fund finances, the impact of 2020 in isolation on liabilities will be modest. As most COVID-19 deaths occurred amongst older members, the Fund would already have anticipated their death occurring in the relatively short term, leading to a muted impact. Additionally, the actuarial assumptions typically used to value Fund liabilities will not automatically ‘bake in’ the full pandemic experience – to do so would reduce liabilities significantly. Rather, a more balanced approach will likely be taken which recognises the uncertainty over the future lifetimes of all members and takes a longer term view on the knock-on impact of the pandemic on improvements to life expectancy in the coming years.

The pre-pandemic trends

Over the period to 2011 we observe a significant and sustained increase in life expectancy. However, the period between 2011 and 2020 has been characterised by more volatility and a general slowing in the rate of increase of life expectancy. Life expectancy continued to improve, but not as quickly or as steadily as before.

Some of this volatility could be attributable to one-off events. During 2012/13 we experienced a harsh and sustained winter, during early 2015 it was found that the flu vaccine had not been as effective as expected and during the winter of 2017/18 we experienced the “beast from the east” and the arrival of “Aussie flu” – a strain that is particularly dangerous for older people. All these events led to increased numbers of deaths, so slower increases in life expectancy.

However, 2019 saw the biggest year-on-year improvement in life expectancy since 2011, driven by the number of deaths in the first half of the year being much lower than average, perhaps attributable to a milder winter and a muted impact from that year’s winter flu.

Prior to taking into account the impact of COVID-19, longevity trends in general 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. The latest summary results for males are included in the table below:

¹Source: PLSA and Club Vita (2017): Longevity trends – Does one size fit all?²

² The numbers in the table are calculated in line with the principles as set out in the referenced PLSA and Club Vita report, 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 2013-2018 are based on data for the years 2012-2019, looking at the change from 2012-2014 to 2017-2019.
• We continue to review the data used for the calibration to ensure it is appropriate for the purpose.

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 2013-2018 period 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 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, the lower socio-economic group has experienced a greater fall in improvements in the 2013-2018 period than those in the higher socio-economic groups which appear to have been more resilient to the drop in improvements over this period. Applying the E&W population trend to a group of pensioners could see future life expectancy overestimated for pensioners in lower socio-economic groups and underestimated for pensioners in higher socio-economic groups. 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.

We will need to watch the emerging data carefully to see whether this “longevity gap” across the socio-economic gap widens as a result of the longer term, broader impacts of the pandemic.

Considering the potential impact of the COVID-19 pandemic

No two LGPS Funds will be impacted by the pandemic to the same extent and, in fact, no two employers within a Fund will see the same mortality impact in relation to the pandemic. The wider longevity impact of COVID-19 is likely to depend on a range of factors specific to each Fund, such as:

• Gender profile – male mortality rates appear to be much higher than for women
• Age profile – deaths primarily appear at older ages
• Health of pensioners – a significant proportion of deaths have pre-existing medical conditions
• Socio-economic profile – there is some evidence that different socio-economic groups are impacted differently by COVID-19

Geography may also play a significant role in the impact experienced by Funds, such as if a particular region observes a local ‘pocket’ of COVID-19 infections, deaths and associated disruption to healthcare services. This was evident in some recent analysis we performed showing how the pandemic has not had a uniform effect on the mortality patterns of pensioners across the UK, demonstrated here by the regional differences between England, Scotland, and Wales.

¹Source: https://www.clubvita.co.uk/news-and-insights/top-charts-21-10-differences-in-covid-19-impact-on-pensioners-in-england-scotland-and-wales

However, as we mentioned above, the long-term after-effects of the COVID-19 pandemic have the potential to generate a much more material impact on liabilities - in either direction - than the additional COVID-19 deaths experienced in 2020 (and 2021 when that data is available in our next index). Furthermore, if we have seen materially different experiences through the initial waves of the pandemic, depending on the specific characteristics of a Fund’s membership, it is reasonable to assume that these long-term effects will also be a “one size doesn’t fit all” story.

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.

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.

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 pensioners used by the index) and avoids any need for 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 LLP
• Life expectancies are based on the experience of English and Welsh LGPS Funds that have provided data to Club Vita as at April 2022.
• 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 do 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.