UK - Nottinghamshire County Council is considering a potential merger of its two Local Government Pension Scheme (LGPS) funds, ahead of the next triennial valuation in 2010.
The council currently operates a main pension fund and an admitted bodies fund which was established under the Nottingham County Council (Superannuation) Act 1985, and allowed separate schemes to be created for local authority employees and employees of bodies that were not local authorities but were still deemed eligible for the LGPS through admission agreements.
The Admission Bodies Fund was originally established to protect the main fund as there were concerns that having non-public sector bodies in the pension scheme would jeopardise the US withholding tax exemption available.
However, as legislative changes that could have led to this never materialised, the council was left with two pension funds. In a report presented to the pensions committee it was noted “within the Local Authority Pension Fund context, most authorities administer just one fund and its is rare for authorities to administer the equivalent of an admitted bodies fund”.
Nottingham therefore commissioned its actuaries Barnett Waddingham to examine the issues involved in the potential merger of the two funds, in the hope that the scheme for admitted bodies fund coudl be wound up and the assets transferred to the main fund.
Latest figures to be presented at the next pension committee meeting in September revealed the value of the main fund increased by more than £100m in the second quarter of 2009, from £1.934bn to £2.045bn (€2.323bn) by the end of June.
The scheme also had an asset allocation of 19% in fixed interest, 32% in UK equities and 28% in overseas equities, 12% in UK property, 4% in overseas property and 2% in unquoted assets with the remainder in cash.
In comparison, the admitted bodies fund was valued at just £65m at the end of June, up from £60.5m at the end of March, although the asset allocation is similar with 20.2% in fixed interest, 67.6% in equities, 7.1% in property and the remainder in cash.
The initial Barnet Waddingham report on the rationale for the existence of two funds noted one reason for maintaining the status quo is the transparency of separate funding and investment strategies as, in theory, local authority employers have “watertight covenants” and can be assumed to be around in some form to underwrite liabilities.
The report highlighted this is “unlikely to be true for all of the employers in the Admission Bodies Fund”, so to reflect this covenant risk the second fund might adopt a more cautious investment strategy and/or more conservative funding assumptions.
That said, the report warned running two funds is “inherently more expensive in terms of administration and compliance costs”, and in its conclusions Barnett Waddingham stated “overall, the Admission Bodies Fund would appear to be a smaller version of the Main Fund”, and added there does not appear to be a strong case for continuing with two funds.
In a follow-up report presented to the pensions administration sub-committee in July, Alan Sumby, the council’s finance service director, noted if the merger goes ahead the “most appropriate timing would be to achieve this before the next triennial valuation, due as at 31 March 2010”.
But while he said the benefits would be a simplified portfolio structure for investments, more efficient and cost-effective administration and the need for just one set of accounts and valuation, an “area of potential concern is likely to be the impact on contribution rates for employers”.
Employers who currently have separately calculated rates should be unaffected by the proposed merger. But it was noted smaller employers fall within the “pooled rates” for contributions which are different in the two funds.
Sumby revealed the full pension committee had agreed Barnett Waddingham should examine the impact on contribution rates in more detail, as well as review any element of covenant risk associated with the merger, with the aim of reporting initial findings to the sub-committee on 15 October and to the full pension committee a week later to “determine the way forward”.
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