Agenda item

Consider presentation by Hymans Robertson LLP. (Copy attached.)

There had been circulated copies of a presentation by Hymans Robertson LLP with the agenda.  The Chairman invited Ms Julie West and Mr Jamie Baxter of Hymans Robertson to provide a presentation.  Mr Baxter explained that triennial valuation was a key risk management exercise for the Fund which was carried out to calculate employer contribution rates; comply with legislation; analyse actual experience compared to assumptions; review the Funding Strategy Statement; and to undertake a continual check on Fund solvency. Since the previous valuation in 2020 there had been significant asset returns due to bounce-back from the Covid-19 associated market fall in February-March 2020, and a material fall in liability values in the second half of the inter-valuation period due to rising interest rates.  Future investment return assumptions had a considerable bearing when calculating liabilities.  Those returns were used to project forward asset values in modelling, and the same approach for the 2020 valuation had been used for 2023.  There were higher return expectations in 2023 when compared to 2020 as a result of increases in global interest rates.  That had a positive impact on the 2023 valuation results.   Mr Baxter explained that Local Government Pension Scheme benefits increase with CPI inflation, which was used to project forward benefits and contributions in modelling.  Ongoing uncertainty around high inflation had formed part of the risk-based approach, which had negatively impacted upon the 2023 valuation results.  Mr Baxter provided a summary of longevity in the Scottish Borders, and explained that the assumptions had been tailored specially to Scottish Borders Council Pension Fund members.  The key valuation assumptions at 2023 were presented, with a discount rate of 5.2% pa, benefit increases/CARE revaluation at 2.3% pa and salary increases at 3% pa.  Those assumptions were robust and evidenced based.  Ms West provided a summary of the whole fund funding level at 31 March 2023 compared to 31 March 2020.  Liabilities had decreased from £650m to 649m, whilst assets had increased from £713m to £866m.  The Funding Level had increased from 110% in 2020 to 134% in 2023.  Ms West highlighted that the reported funding level did not directly drive employers’ contribution rates.  The funding position of the fund was stronger at 2023 than 2020, in particular due to the increase in future investment returns as a factor.  Ms West provided an overview of the 3 steps to setting the funding strategy, which included the funding target, the time horizon, and the likelihood of success. Those circumstances allowed the Fund to manage risk.   The Fund operated a Contribution Rate Stability Mechanism (CSM) for the Scottish Borders Council pool group of employers.  Annual changes to rates were restricted to +/- 0.5% of pay.  Ms West outlined that stabilisation took a long-term approach to setting contribution rates which cut through short-term funding “noise”.  The mechanism was an explicit one, documented in the FSS.   The CSM was designed to keep contribution rates stable through the peaks and troughs of market cycles.  Surpluses could be managed by reducing the employer contribution rate, changing the investment strategy, increasing prudent levels or retaining the surplus.   The funding level excluded the cost of future service benefits.  Ms West outlined the key factors which had been considered at the 2023 valuation, in particular the need to avoid a knee-jerk reaction to the significant increase in surplus.  It was highlighted that almost all of the increase in surplus was due to changes in liability assumptions rather than actual investment performance.  The cost of funding future service benefits must be met, with contribution rates reflecting fairness of costs between generations.  Market conditions and economic variables, such as interest rates and inflation, were currently volatile.  It was confirmed that the Fund prepares, maintains and consults on the Funding Strategy Statement in line with CIPFA guidance.  The final decision on the Funding Strategy would be presented to the Committee for approval.  In response to a question regarding an extra 0.5% provision in relation to the McCloud judgement, Ms West outlined that there was now less of a chance of benefit increases occurring as a result of the cost cop, and that the ramification of the McCloud case had been built into the overall liabilities.  The Chief Officer – Audit and Risk confirmed that there the Audit team had engaged with Hymans Robertson regarding aspects of risk management and the range of assumptions. 

DECISION

NOTED the presentation.