By Craig Alexander, Actuary and Head of LGPS Accounting at Hymans Robertson
Employers and their auditors should prepare in advance for a potential net asset and decide on the likely accounting treatment they will follow for their own accounts, which unfortunately is not quite as straightforward as when there is a net liability. The accounting treatment differs depending on the employer’s own accounting policies, whether they report under IAS19 or FRS102, whether they are open to new LGPS members etc.
Although it would not be an update from an actuary without at least one piece of bad news
There is one known event that will serve to offset some of the above positive balance sheet movement. LGPS benefits (in payment and those accruing) are very likely to increase by 10.1% in April, in line with government past practice of linking the annual Pensions Increase Order to the CPI figure from the preceding September. This is a significant annual increase and far higher than any year 1 assumption built into employer accounting figures last year, typically increasing obligations by 5-6%. Further to this, observed CPI movements from September 2022 to 31 March 2023 may also need to be considered within the accounts, particularly as these figures continue to be significantly higher than underlying medium to long term expectations.
And more unfortunate news
Sadly, 2022 is shaping up to be another year where excess deaths are higher than expected. Expectations were that things may return to something more normal after the sharp rise in Covid related deaths experienced in both 2020 and 2021. And although deaths directly linked to Covid have reduced in 2022, there has been a noticeable trend of other excess deaths over the first 3 quarters of the year (with more data still to be released for the end of the year soon). As a result of this emerging data potentially being a sign of lower future life expectancy, we once again recommend that employers ensure they take account of the latest available longevity assumption evidence when setting assumptions for their LGPS accounts. Somewhat conflictingly, making this allowance will slightly improve the accounting balance sheets.
Old news
Auditors are continuing to take a keener interest in the LGPS accounts and will continue to require more information from a combination of the employer, the Fund and the actuary to sign off the accounts. We expect 2023 to be the busiest year in recent times for LGPS accounting. We've already done lots of preparatory to work to date (and will continue to do so) with audit oversight bodies and the individual audit firms to make the exercise as efficient and cost effective as possible.
In addition this year for English and Welsh based employers, the 2023 accounting reports will be the first to be based off the newly available results from the triennial funding valuations at 31 March 2022. On top of the regular year end pension accounting challenges, the once every 3 years valuation recalibration can introduce experience items on both the asset and obligation side of the balance sheet. Of course it’s important to remember that whether the accounting figures look good or bad, they do not impact the cash contribution requirements that employers pay to their LGPS Fund.
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