Three pensions specialists at Aon, a consulting firm, have highlighted six areas that the UK’s huge pension fund for local authority workers needs to focus on in 2017.
The fund, known as the Local Government Pension Scheme (LGPS), is one of the UK’s largest pension funds with over 5 million members. It is going through a major asset pooling exercise in order to gain scale and reduce fund management costs.
The six key areas that Karen McWilliam, Alison Murray and Colin Cartwright – who are all partners at Aon – highlight are:
Asset pooling: While the LGPS has made progress in the last year it needs to maintain its concentration, thinking about how assets will be moved into new structures by the April 1, 2018, deadline. The right governance arrangements must be in place and decisions made with suitable levels of transparency.
ESG: Environmental, social and governance considerations, known as ESG, are an area of ever increasing interest for investors. Cartwright says: "The LGPS has been a big advocate of responsible investment in the UK – but now is the time for schemes to fully integrate their approaches into their strategic decision making processes.”
Data quality/improvements: Administration must be scrutinised, particular to identify data gaps and inaccuracies in relation to all fund employers and all categories of scheme members. Data improvement plans must be installed and opportunities to clear up historical data, such as old scheme part-time hours, should be taken.
Accurate data reduces the need for the actuary to have to make assumptions about the data when valuing liabilities.
These steps will also prepare funds for the new General Data Protection Regulations (GDPR) and help cope with the threat of cybercrime.
Employer risk: The LGPS must ensure employer risk and funding are adequately assessed and embedded within governance structures and reflected in a scheme’s funding strategy.
Administering authorities need to look ahead to the 2019 valuations and to ensure that there is sufficient time for appropriate analysis, consultation and engagement with employers well before the valuation date.
Appropriate resource and expertise: A review of pension fund resources should be a priority if it has not already taken place. Do all administering authorities have the appropriate amount and level of expertise in place to deliver a good quality and compliant service to its stakeholders, particularly given the ongoing challenges that they face?
Legislative change: In some ways this is business as usual, said Murray. There has been no shortage of legislative change in recent years. But schemes need to remain agile and capable of responding to legislative developments.
In the wider context of these recommendations, McWilliam drew attention to the revised capital market rules in the EU, known as MiFID II.
“2017 has been an extremely busy year for public sector pension schemes and for those in the LGPS in particular. And there isn’t likely to be much let up as they approach the end of the year, given the 3 January deadline for the new MIFID II requirements relating to the classification of administering authorities.”
The classification of local authorities under MiFID II was recently highlighted by the UK’s main pension fund trade group, in ‘5 MiFID II actions’.
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