Annual Report and Accounts 2006

Chair’s introduction

Our aim is to provide secure pensions, effectively and efficiently administered at a low stable cost to employers.

Managing the cost of defined benefit schemes to employers has undoubtedly been challenging in the 21st century. Factors such as improved life expectancy combined with a fall in interest rates have resulted in increasing liabilities. Funding levels were further affected by the three years of stock market falls ending in March 2003.

Whilst we have been adversely affected by these financial factors, I am pleased to report that the impact on GMPF has been materially less, primarily because of excellent relative investment performance. This has helped the Fund’s Actuary to contain the increase in employer contributions and maintain average employer rates at the lowest levels nationally.

Excellent Long Term Returns

In 2005/06 the world’s stock markets delivered returns in excess of 30%, contributing to an overall Fund return of over 22%. As a result, the Fund increased in value by £1,583 million to £8,944 million. In comparison with other local authority funds, the return was 2.2% less than the average fund. The reasons for this underperformance were that the Fund had a more cautious investment strategy, holding less in equities than the average fund and the Fund’s managers underperformed in their selection of UK equities. However, the long term performance of the Fund remains excellent with a long term outperformance of approximately 1% over 10, 15 and 20 year durations. Over the last five years, the Fund has outperformed the average LA fund by 1.2%. To put this outperformance in context a 1% outperformance currently equates to over 6% of pay for employers.  More details of the Fund’s performance can be found on page 9 of this report.

Funding Issues

Last year, I reported a Funding Level of 93% following the conclusion of the Fund’s valuation as at 31 March 2004. The funding level was amongst the best in the country for LGPS funds and compared to a national average of around 75%.

By 31 March 2006, this had further improved to a level of approximately 99%, although it is still too early to forecast the likely impact on employer contribution rates arising from the 2007 valuation (with revision to rates taking effect from April 2008). It is worth remembering that for some employers, it was planned to phase in contribution rate increases over four years at the 2004 valuation and in determining employer rates, credit was taken for the abolition of the “rule of 85” with effect from April 2005. Investment returns during 2006/07 and changes in interest rates will also have a material impact on the funding level and the determination of employer contribution rates. Should rates need to increase, the Actuary may use the flexibilities available to him to phase in contribution increases over several years to assist with affordability.

As we went to press, we had just received further amendment regulations, which will phase out the “rule of 85” from March 2008, together with greater protections for some Scheme members nearing retirement.
The 2006 Amendment Regulations also introduced changes to the LGPS to reflect the “simplified tax regime” introduced by the Government in the 2004 Finance Act.  These changes include scope for the member to increase the size of their lump sum by exchanging pension for lump sum and to save more for their pension.
More details of the changes are on page 27.

The Government is currently consulting stakeholders on a new look LGPS, and in preparation for this, the Management Panel has been evaluating the options and the redistributive impact such changes may have on the Scheme membership. The Panel recognises the complexity of the issues and we are keen to help develop understanding of the issues. As part of the consultation process, we will be sharing the results of our research with employers, trade unions and Government Ministers. The Government is seeking responses to the consultation paper by 29 September 2006 with the aim of introducing the new scheme by April 2008. I encourage all interested parties to respond.

Following the Pension Commission’s report, the Government has issued a White Paper that outlines some long term proposals for pension provision in general, with the aim of reducing pensioner dependency on means tested benefits. Proposals include encouraging saving through the provision of a National Pension Savings Scheme, restoration of the earnings link for pension increases and later retirement. Overall, I am pleased to see the Government is taking steps to help those who save for their pensions reap the benefit in retirement. Hopefully, the next round of legislation will further improve the situation.

Growth in Membership and Employers

Membership continues to grow in all categories, with the growth in deferred members expected to grow even more in the future. Similarly, we continue to admit new employers, mainly as a result of increased partnership working and local authorities adopting different ways of service delivery. To minimise the risk arising from future default, we insist on all such new employers having a local authority guarantor.

Conclusion

In summary, the Fund’s long term performance on both the investment and administrative fronts has continued to be excellent. I again thank the members of the Panel, the Advisors, Investment Managers and the staff for their work over the last 12 months.

Councillor Roy Oldham, CBE,
Chair, Pension Fund Management Panel

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