2022 was one of the most turbulent years in recent times. In this blog, we share our outlook on the priorities that funds should be focusing on and planning for this year.

Actuarial

Strategy evolution: Conflict in Europe, rising geopolitical tensions globally, the aftereffects of the pandemic, rocketing inflation and rising interest rates have conspired to increase market volatility. For the LGPS, the changing economic environment requires review and evolution of funding strategy. There’s no perfect, correct or obvious answer so you will need to be able to have sufficient time to explore the options, justify your choices to all stakeholders and evidence decision-making.

Action: Review the funding position of all your employers to understand what recent changes mean for their position in the Fund. Look at this output to see where there are opportunities (eg affordable exit or de-risking for small, closed employers? employer-level investment strategies?) and what are the risks (eg large exit credits, unrewarded investment risk). A useful first step could be a strategy day to revisit plans, agree immediate actions and discuss next steps.

Enhanced monitoring: One of the pension industry takeaways from the recent period of volatility within gilt markets, is the need for robust monitoring, understanding and management of risk. We're not immune to this in the LGPS and all need to review, modernise and improve practices against a backdrop of continuing volatility. This enhanced monitoring will also be key in spotting emerging opportunities.

Action: Create a clear plan on how you will formally monitor key funding risks and opportunities, including the metrics you need at employer level. The plan should also set out what actions you will take and, importantly, when. For example, high inflation requires modelling to understand, and stress test the impact on your cashflow and liquidity position. Based on the results, set a clear plan around triggers and ongoing monitoring.

Continued engagement: Improved funding and more regulatory flexibility has created additional options for councils and employers. This has led to wider and fuller engagement through the 2022 valuations. However, the likelihood of volatile funding and budgetary pressures ahead means we must maintain and evolve engagement. This will give the LGPS the best chance of successfully navigating the next few years and continue to deliver positive outcomes.

Action: In England and Wales, consider a post-valuation employer engagement plan to build on the successes of 2022 and maintain momentum. For Scottish funds, get a head start on the valuation by working with stakeholders now to consider the balance of contribution rates, investment risk and prudence levels (in both the short- and long-term).

Governance, Administration and Projects

Governance: We hope to see implementation of TPR’s Single Code of Practice and the E&W SAB Good Governance Project recommendations and, in particular, the consultation around a proposed new requirement that each fund have a workforce plan. Workforce planning could be an opportunity to take an LGPS-wide approach, if not to current resource challenges, then to those which may arise in future as member and employer needs change and increased automation is implemented.

Action: Consider reviewing your current governance arrangements and compliance position against the expected changes to make sure you can prioritise key actions to drive future compliance. Make sure you respond to the Good Governance consultation to ensure that your fund’s voice is represented in any final decisions.

Administration: As we enter a new year and wish for a calmer period, administration challenges will continue to be at the forefront of Pension Managers’ minds, with deadlines in relation to the Pensions Dashboard and McCloud becoming closer at a time when the LGPS continues to find resourcing a challenge. The need to do more with the same, or less, resource will see funds taking difficult decisions.

Action: Review your fund’s business plans and resourcing plans to make sure you know where pinch points are and, in so far as possible, can take actions to maximise the chances of achieving your goals. Pension Managers might also need to consider business cases for external support options and/or contingency planning if the challenges worsen.  

Projects: We're seeing an increase in funds looking to review their own structures to maximise resources, improve governance and make the most of technology in service delivery. Alongside these, the multitude of competing undertakings may lead you to consider how you will deliver this work and whether a project structure, with associated monitoring and reporting, would be appropriate to make the implementation process more efficient. There is a lot to do alongside your BAU delivery and we would encourage funds to leverage prioritisation tools (such as MoSCoW) to identify the key areas where resources should be focussed.

Action: Review all that you have on the to-do list and find areas where prioritising and working more efficiently could reduce pressure on teams. 

Investment

Time to deliver – We identified climate change as a key priority for 2022 and suspect we'll do so again in the coming years. Many LGPS funds made good progress on this issue during 2022 setting out interim objectives, considering the impact on investment strategy and strengthening engagement with managers and portfolio companies. We expect the identification and implementation of the tangible actions required to deliver agreed goals and objectives will be a key focus in 2023. Data coverage and quality remain a huge issue and will also require continued focus during the year.

Action: Review climate action plans to ensure they are ambitious, realistic and strike the right balance between mitigating risk and capturing investment opportunities. Ensure that delivery is supported by appropriate governance structures, and aim to hit the ground running on implementation in 2023.

Inflation – yesterday’s issue? - Inflation may have peaked in the UK and continue falling throughout 2023. But given high inflation has become so broad-based and entrenched in wage settlements etc, we expect higher inflation will persist for longer than the market currently expects (or hopes). It seems perverse therefore to suggest that the issue is behind us. We're not suggesting that high inflation will not continue to have significant impacts on the UK economy going into 2023. But we do believe that consideration now needs to be given to the recession that now seems most likely to follow.

Action: Review your portfolio and consider how asset values and income levels would be affected by different levels of economic slowdown. Are appropriate mechanisms in place either at an asset-level – prudent leverage, debt covenants/security – or at a portfolio level – diversification or hedging – to mitigate risk?

Riding the wave - It now seems likely that 2023 will be the year when LGPS funds have to deal with a wave of new - and not-so-new - policy, regulation and best practice. At the last count the list includes further guidance on pooling and Good Governance, Taskforce for Climate-related Financial Disclosure requirements, UK Stewardship Code, policy on boycotts, divestments and sanctions as well as the potentially far reaching changes in UK financial services regulations (the “Edinburgh Reforms”). Further delays are of course possible, but we would encourage funds to get ready to “ride the wave” going into 2023.

Action: Ensure you are aware of the potential impacts of each development, and where possible, develop a position on the likely proposals so that you are ready to influence them for the better. Where the likely requirements seem fairly certain, undertake gap analysis to identify what actions you will need to take to ensure compliance.

If you have any questions, or would like to discuss anything further, please get in touch.