Setting employer contribution rates
The Fund relies on three sources of income. Together these make up the assets used to pay pension benefits:
- member contributions
- employer contributions
- investment returns.
Member contributions are set nationally and are only changed in specific circumstances following an assessment of the cost of the LGPS. This is carried out by the Scheme Advisory Board and information about this process can be found on their website.
Employer contributions make up any difference between the value of your liabilities and the combined value of member contributions and investment returns. The size of the expected gap between these sources of income and the value of liabilities affects the amount of employer contributions needed. A larger than expected gap means more employers contributions are needed and a smaller expected gap means less employer contributions are needed.
Investment returns are the income the Fund receives by investing member and employer contributions. The value of the Fund’s investments move up and down daily. This is known as investment risk and means the actual income received from investments is not certain. The actuary makes an assessment, of what it thinks the value of investment returns will be.
At each valuation, we set a contribution strategy based on three main factors:
- your funding target
- your funding target date – also known as your funding ‘time horizon’
- confidence (probability) of success.
Funding target
To set employer contribution rates, we need to know how much money is needed to pay pension benefits (the value of liabilities). This is known as the funding target.
The LGPS is a defined benefit scheme, which means the benefits paid to members are set or defined by the regulations. The pensions received by members is based on a combination of a percentage of the pensionable pay they receive and the number of years they contribute to the LGPS. The benefits are also protected against inflation so increase in line with the cost of living.
The total value of your liabilities depends on several factors that can’t be known for certain. Some of the main factors affecting the total value of your liabilities include:
- future changes to members’ pensionable pay
- how long a member pays into the LGPS
- how long members (and any dependants) live after retirement
- future changes to the cost of living.
This means that the actuary must make several assumptions about these factors to work out how much money they think is needed to pay the pension benefits. These assumptions and actual experience are reviewed every three years as part of the valuation process.
Funding target date / time horizon
The funding target date is the date by which we aim to ensure your liabilities are fully funded (the value of expected assets is the same as the value of expected liabilities). This is usually described as your time horizon and is shown in the number of years until the target date. For example, you could have a 1, 5, 15 or 20 year time horizon.
The funding target date is usually the date that we expect you’ll stop employing LGPS members (either because your admission has ceased, or your last active member has left employment). For those who will always employ LGPS members like large local authorities and schools, we use a rolling 20-year time horizon.
Confidence / probability of success
As we can’t be certain what the actual funding target or time horizon will be, we take a risk-based approach to setting your contribution strategy. This helps us to balance the need to ensure the solvency of the Fund and that employer contribution rates are as sustainable and stable as possible.
- The probability of success is based on the type of employer you are and recognises the different levels of risk to the Fund of different employers. Once we know:
- a funding target
- a funding target date
- know how confident we want to be that the contribution strategy will work
we can set your contribution rates. The actuary works out how much of the funding target will be met by the combined value of member contributions and the Fund’s investment returns. Your contribution rate makes up the difference.
What should I do as a scheme employer?
Make sure you give us quality data
The quality of the data we hold about your members is key to the results of the valuation. Our actuary makes calculations based on the data you give us. If the data is wrong, the valuation may be inaccurate. Your rates could then be too high or too low.
Keep your contacts up to date.
We provide updates to employers throughout the year. So, it’s vital that our contacts for you are up to date. If any of your named contacts change, please let us know by completing our ‘Contacts request form’.
What should I do once I get my results?
- Read the results schedule to understand your current funding position and the rates you need to pay from the following April.
- Review our Funding strategy statement to understand how the Fund’s strategy applies to you. You can find the latest reports on the funds and investment policies section of each Fund’s key documents page.
- Get in touch by the 31 January if you want to discuss your results. Any discussions about your rates must take place before the end of the consultation period.
