Agenda item

RESOLVED:

(a)  The Committee noted the report and activity since the September 2019 meeting and consultation.

(b)  The Committee approved the final Funding Strategy Statement.

            Mr Middleman noted that at the September meeting the draft Funding Strategy Statement (FSS) had been discussed and the consultation with employers went ahead in November (including the AJCM and meetings with individual employers) with comments being invited. There had been no material changes to that draft but there had been some minor changes as a result of the discussions with employers and also due to lack of progress on certain national issues and structural changes.

            Mr Middleman updated the Committee on the state of play on the consultations on the 4-year valuation cycle and Fair Deal which were due to introduce protected status for members and a Deemed Employer route. There has not been any response to the 4-year valuation consultation and the Fair Deal consultation has not been progressed. It is not envisaged that either of these will be progressed before the FSS needs to be signed off so the related wording has been removed from the FSS. These will be reinserted as required and brought back to Committee once there is an update from those consultations.

             Mr Middleman made the following key points;

-       When Mercer set assumptions, in particular around inflation, Mercer look at the best estimate of RPI from market yields on Government Bonds.  Mercer then estimate CPI inflation (the increases applied to liabilities) by deducting 1% p.a. from RPI (i.e. an RPI-CPI gap of 1% p.a.).

-       Following the proposed change in RPI to be more like CPIH, in the September 2019 announcement, the market implied RPI inflation had shifted. Whilst this does not affect the assumptions at the valuation date (31 March 2019) it is important that the Fund recognise this update in the FSS. If this wasn’t recognised it would result in using an assumption for CPI (based on the current RPI / CPI gap) which is too low and hence undervaluing liabilities in future calculations.  It was noted this will be discussed in more detail in the next item but the proposal is to reduce the RPI to CPI gap to 0.7% p.a. to compensate for this.  The consultation on the change is expected as part of the Budget on 11 March 2020 and the position will be kept under review.

-       The overall funding level was 91% at the valuation date, with a deficit of £175m.

-       The ongoing cost of benefits as a result of the valuation was 17.3% of pensionable pay.

-       Contribution rates for employers will be implemented on this basis from 1 April 2020.

            On page 25, the Chairman asked why the average deficit recovery period increased from 12 years in the draft FSS to 13 years. Mr Middleman noted this was an average and that different employers (including the Councils) had different periods appropriate to their circumstances and most had reduced by 3 years but 2 Unitary Councils had reduced by 2 years. It was also noted that it is the overall set of parameters that matter i.e. other assumptions like the discount rate are perhaps more important. Furthermore, there have been in-depth discussions regarding this, the affordability of contributions overall and including allowance for McCloud costs. There needs to be a balance agreed when setting a funding plan because it has to be fair to all tax payers (current and future generations) and given that the recovery period for the Fund was relatively short, Mr Middleman was comfortable overall that this is a fair position. Mr Everett added that it was decided to extend Flintshire County Council's recovery period by a year in order to help balance the budgets, which he believes is a reasonable step that was agreed with the Actuary after a   well-informed period of discussion.

            In respect of the McCloud judgment, Mr Middleman noted that a key part of the setting the strategy is whether to allow or not allow for the potential costs of the McCloud ruling in the contributions paid to the Fund. As the employers had decided to include it directly (as opposed to considering it a budget risk in the future) this gave more credence to concluding the deficit recovery period was fair.

            Mrs McWilliam queried why the link between RPI and CPI was not listed as one of the risks in the ISS.  Mr Middleman said that it is a structural change but no real difference from any other change to inflation (which was covered).  Mercer do not know how it will manifest yet, but whilst there is no harm in including it explicitly in the ISS they do not believe it is required at this point.

RESOLVED:

(a)  The Committee noted the report and activity since the September 2019 meeting and consultation.

(b)  The Committee approved the final Funding Strategy Statement.