39. Defined benefit pension schemes - Notes to the core accounting statements
Participation in Pension Schemes
As part of the terms and conditions of employment of its officers, the Authority makes contributions towards the cost of post-employment benefits. Although these benefits will not actually be payable until employees retire, the Authority has a commitment to make these payments in the future.
As at 31 March 2020 the Authority participates in four post-employment schemes, all of which are defined benefit schemes:
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The Local Government Pension Scheme (LGPS)
This scheme is for administrative, support and Control employees. It is a funded scheme, which means that contributions are paid into a fund with the intention of balancing pension liabilities with pension assets. It is administered in accordance with the Local Government Pension Scheme Regulations 2013, and it provides benefits based on career average revalued earnings.
The administering authority for the fund is Nottinghamshire County Council. The Pension Fund Committee oversees the management of the Fund whilst the day to day Fund administration is undertaken by a team within the administering authority. Where appropriate some functions are delegated to the Fund's professional advisors. The administering authority is responsible for the preparation and maintenance of the Funding Strategy Statement and the Investment Strategy Statement. These should be amended when appropriate based on the Fund’s performance and funding.
By participating in the Local Government Scheme, the Authority is exposed to a number of risks:
- Investment risk: The Fund holds investments in assets such as equities which have volatile market values and, while these asset are expected to provide real returns over the longterm, the short-term volatility can cause additional funding to be required if a deficit emerges.
- Interest rate risk: The Fund’s liabilities are assessed using market yields on high quality corporate bonds to discount the liabilities. As the Fund holds assets such as equities, the value of assets and liabilities may not move in the same way.
- Inflation risk: All of the benefits under the Fund are linked to inflation and so deficits may emerge to the extent that the assets are not linked to inflation.
- Longevity risk: In the event that the members live longer than assumed, a deficit will emerge in the fund. There are also other demographic risks.
- “Orphan” liability risk: As many unrelated employers participate in the Nottinghamshire County Council Pension Fund, there is an orphan liability risk that employers may leave the Fund but with insufficient assets to cover their pension obligations so that the difference may fall on the remaining employers
These risks are mitigated to a certain extent by the requirement to charge the General Fund with the amounts payable to the pension fund or pensioners at the year end, in accordance with statute.
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The Firefighters’ Pension Scheme 1992 (1992 FPS)
The Firefighters’ Pension Scheme 1992 is an unfunded pension scheme. This scheme has been closed to new entrants since 6 April 2006. Its members are wholetime firefighters. It is a defined benefit, final salary scheme and its arrangements are governed by statute (the Firemen’s Pension Scheme Order 1992).
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The Firefighters’ Pension Scheme 2006 (2006 NFPS)
The Firefighters’ Pension Scheme 2006 is also an unfunded pension scheme. This scheme came into effect from April 2006 and its members are retained firefighters and wholetime firefighters. Like the 1992 FPS it is a defined benefit, final salary scheme and its arrangements are governed by statute (the Firefighters’ Pension Scheme (England) Order 2006). The Firefighters’ Pension Scheme (England) (Amendment) Order 2014 introduced a new modified version of the 2006 Scheme which is available to individuals who were employed as retained firefighters during the period 1 July 2000 to 5 April 2006. Although this modified version does not constitute a scheme on its own, it has different benefits to the main 2006 Scheme. The 2006 Scheme has been closed to new entrants since 1 April 2015.
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The Firefighters' Pension Scheme 2015 (2015 FPS)
The Firefighters' Pension Scheme 2015 came into effect on 1 April 2015. Like the 1992 FPS and the 2006 NFPS, it is an unfunded defined benefit scheme and its arrangements are governed by statute (the Firefighters' Pension Scheme (England) Regulations 2014). However, unlike the other two firefighters' schemes, it is a career average rather than a final salary scheme.
The three Firefighters’ Schemes are very similar in nature. They are unfunded pension schemes, meaning that there are no investment assets to meet the cost of pension liabilities and cash has to be generated to meet pension payments as they fall due. The Authority has primary responsibility for meeting the costs and managing the risks relating to the firefighters’ pension arrangements. However, there is currently an arrangement in place whereby the cost of the schemes are met from contributions paid by employees and the Authority, with any deficit in the funding required being met by a top-up grant from the Home Office. Any surplus funding is paid over to the Home Office.
The 1992 FPS and 2006 NFPS provide benefits based on final salary and length of service at retirement, and the 2015 FPS provides benefits based on revalued average salary. The governance arrangements are managed by the Authority, and this essentially involves managing the cash flows and being responsible for the administration of the schemes. The day to day administration was carried out by Leicestershire County Council on behalf of the Authority until 30 November 2020, and by West Yorkshire Pension Fund from 1 December 2020 onward.
Given that the pension schemes are unfunded, the contributions payable are simply those which are sufficient to meet the benefit outgo as and when it arises. As mentioned above, this benefit outgo is largely underwritten by the Home Office. By participating in these pension schemes, the Authority is exposed to some risks:
- There are no investment risks in relation to these schemes as they are unfunded. The greatest single risk is that the government could change the arrangements for meeting part of the benefit outgo, which could increase the Authority’s contributions.
- There is a risk that changes in the assumptions (e.g. life expectancy, price inflation, discount rate) could increase the defined benefit obligation. Other assumptions used to value the defined benefit obligation are also uncertain, although their effect is less material.
A Pension Top-up Grant is received annually from the government to meet the cost of the net funding deficit for the three firefighters' schemes. It is paid directly to the Firefighters’ Pension Fund (see the Pension Fund statements on pages 108 to110) and it is therefore not the Authority’s income. However, in IAS 19 terms it is a current contribution towards the Authority’s liabilities for retirement benefits. The grant is therefore credited to other operating income in the Comprehensive Income and Expenditure Statement. The grant is not treated as an asset of the firefighters’ pension schemes, but as a source of income to the schemes it does reduce the year end pension liability.
The Authority also participates in the Firefighters’ Compensation Scheme. The Firefighters’ Compensation Scheme (England) Order 2006 makes provision for the payment of pensions, allowances and gratuities to and in respect of persons who die or are permanently disabled as a result of an injury sustained or disease contracted while employed by a fire and rescue authority. The level of benefits payable is dependent on salary, service and the degree of disablement of the individual at the time the injury is incurred. Therefore the level of long term benefits can be both material and volatile. For this reason the Compensation Scheme is treated as an unfunded defined benefit scheme and accounted for, under International Accounting Standard 19 (IAS 19), in the same manner as for the Firefighters’ Pension Schemes.
The Compensation Scheme is administered by the Authority in accordance with statutory arrangements. The cost of the scheme is met solely by the Authority. The risks arising from the Authority’s participation in this scheme are as follows:
- There is a risk that changes in the assumptions (e.g. life expectancy, price inflation, discount rate) could increase the defined benefit obligation. Other assumptions used to value the defined benefit obligation are also uncertain, although their effect is less material.
- There is a risk that the government could change the arrangements of the scheme in such a way that the costs incurred by the Authority are significantly increased.
- Historically the number of firefighters who are permanently disabled or who die as a result of injuries sustained or diseases contracted whilst in the employment of the Authority is very low, so the number of injury pension recipients is relatively small. However, the Authority is committed to pay benefits as and when they fall due, so if the number of occurrences were to increase it could have a significant impact on the amounts payable.
Court of Appeal ruling for Firefighters / Judges Pension Schemes (the Sergeant and McCloud cases)
The decisions of the Court of Appeal in the Sargeant/McCloud cases (generally referred to as the "McCloud Judgment") ruled that the transitional protections afforded to older members when public service pension schemes were amended constituted unlawful age discrimination. An interim order was made by the Employment Tribunal on 20 December 2018 which provided that members are entitled to be treated as if they had remained in the 1992 FPS or 2006 NFPS, as long as they were in these schemes at 31 March 2012 and at 31 March 2015. All members will by placed in the 2015 FPS for service after 1 April 2022 (the end of the remedy period). Benefits accrued in the final salary schemes to 31 March 2022 will remain protected.
The Government consulted on proposals to remove the discrimination and responded on 4 February 2021. Details of this proposal and the response are available online from GOV.UK. There remain several outstanding issues that will not be resolved until such time that the Government finalises its approach and legislation is in place to remove the discrimination identified by the McCloud/Sargeant ruling.
When assessing the potential implications of McCloud in the March 2019 IAS 19 exercise the actuaries calculated the additional liability that would have arisen had members who were not afforded protection continued to accrue benefits in the older final salary schemes. The approximate costs were included in the overall pension liability figure as at 31 March 2019 as a past service cost. In preparing the 31 March 2021 accounting figures, the actuaries have continued to reflect the potential costs arising from the McCloud Judgement on an approximate basis, following on from the exercise undertaken as at 31 March 2019. Once the details of the remedy are finalised the actuaries will reassess the accounting position in full across the schemes to reflect the actual impact and costs.
Transactions Relating to Post-employment Benefits
Past service costs of £223k and £10k relating to the 2006 NFPS and the LGPS respectively are recognised under Corporate and Centralised Services in the Comprehensive Income and Expenditure Statement. The 2006 NFPS past service costs relate to the purchasing of back service credits by members of the modified version of the Scheme. The LGPS cost is a curtailment relating to the payment of an unreduced pension on early retirement.
A net settlement cost of £790k relating to the LGPS is also recognised under Corporate and Centralised Services in the Comprehensive Income and Expenditure Statement. This settlement cost arose due to the cessation of Nottinghamshire Fire Safety Ltd, of which the Authority was a guarantor.
The Authority recognises the cost of retirement benefits in the reported cost of services when they are earned by employees, rather than when the benefits are actually paid as pensions. However, the charge against council tax is based on the cash payable in the year, so the real cost of post-employment/retirement benefits is reversed out of the General Fund to the Pension Reserve via the Movement in Reserves Statement.
Following the most recent triennial funding valuation of the LGPS the Authority opted to prepay its secondary contributions for the three years to March 2023 by making a single lump sum payment of £548k in April 2020, thus achieving a saving of £40k. Whilst the full payment of £548k has been recognised in the movement on the net pension liability, only the amount relating the 2020/21 has been charged to the general fund. The remaining balance is held on the Authority's balance sheet as a prepayment.
The following transactions have been made in the Comprehensive Income and Expenditure Statement and the General Fund Balance via the Movement in Reserves Statement during the year:
LGPS £'000 2019 / 20 | Firefighters' schemes £'000 2019 / 20 | LGPS £'000 2020 /21 | Firefighters' schemes £'000 2020 / 21 | |
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Comprehensive Income and Expenditure Statement | ||||
Cost of Services | ||||
Service cost comprising: | ||||
1,967 | 9,026 | - current service costs | 2,335 | 8,674 |
660 | 2,641 | - past service costs, including curtailments | 10 | 223 |
0 | 0 | (Gains) / losses on settlements | 790 | |
14 | 0 | Administration expenses | 15 | 0 |
Financing and Investment Income and Expenditure | ||||
547 | 13,018 | Net interest expense | 573 | 12,777 |
3,188 | 24,685 | Total Post-employment Benefits charges to the Surplus or Deficit on the Provision of Services | 3,723 | 21,674 |
Other Post-employment Benefit charges to the Comprehensive Income and Expenditure Statement | ||||
Remeasurement of the net defined benefit liability comprising: | ||||
3,101 | 0 | Return on plan assets (excluding the amount included in the net interest expenses) | (6,231) | 0 |
(1,038) | (9,604) | Actuarial (gains) and losses arising on changes in demographic assumptions | (596) | 0 |
(6,789) | (9,881) | Actuarial (gains) and losses arising on changes in financial assumptions | 17,215 | 97,359 |
1,799 | 0 | Experience (gains) and losses | (614) | (5,772) |
413 | 0 | Other actuarial gains and losses | 0 | 0 |
674 | 5,200 | Total Post-employment Benefits charged to the Comprehensive Income and Expenditure Statement | 13,497 | 113,261 |
Movement in Reserves Statement | ||||
(3,188) | (24,685) | Reversal of net charges made to the Surplus or Deficit on the Provision of Services for post-employment benefits in accordance with the Code | (3,723) | (21,674) |
Actual amount charges against the General Fund Balance for pensions in the year: | ||||
1,012 | 14,862 | Employers' contributions payable to the scheme | 1,555 | 13,680 |
770 | Retirement benefits payable to pensioners | 745 |
Firefighters' Pension Scheme 1992 £'000 | Firefighters' Pension Scheme 2006 £'000 | Firefighters' Pension Scheme 2015 £'000 | Firefighters' Compensation Scheme £'000 | |||||
---|---|---|---|---|---|---|---|---|
2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | |
Comprehensive Income and Expenditure Statement | ||||||||
Cost of Services | ||||||||
Service cost comprising: | ||||||||
- current service cost | 4,266 | 3,841 | 2,834 | 2,874 | 1,099 | 1,133 | 827 | 826 |
- past service cost | 2,434 | 0 | 207 | 223 | 0 | 0 | 0 | 0 |
Financing and Investment Income and Expenditure | ||||||||
Net interest expense | 10,836 | 10,514 | 1,188 | 1,249 | 194 | 225 | 800 | 789 |
Total Post-employment Benefits charges to the Surplus or Deficit on the Provision of Services | 17,536 | 14,355 | 4,229 | 4,346 | 1,293 | 1,358 | 1,627 | 1,615 |
Other Post-employment Benefits charges to the Comprehensive Income and Expenditure Statement | ||||||||
Remeasurement of the net defined benefit liability comprising: | ||||||||
Actuarial (gains) and losses arising on changes in demographic assumptions | (7,976) | 0 | (895) | 0 | (127) | 0 | (606) | 0 |
Actuarial (gains) and losses arising on changes in financial assumptions | (7.416) | 70,490 | (1,473) | 16,328 | (276) | 3,356 | (716) | 7,185 |
Experience (gains) and losses | 0 | (5,160) | 0 | (248) | 0 | (173) | 0 | (191) |
Total Post-employment Benefits charged to the Comprehensive Income and Expenditure Statement | 2,144 | 79,685 | 1,861 | 20,426 | 890 | 4,541 | 305 | 8,609 |
Movement in Reserves Statement | ||||||||
Reversal of net charges made to the Surplus or Deficit on the Provision of Services for post-employment benefits in accordance with the Code | (17,536) | (14.355) | (4,229) | (4,346) | (1,293) | (1,358) | (1,627) | (1,615) |
Actual amount charged against the General Fund | ||||||||
Balance for pensions in the year: | ||||||||
Employers' contributions payable to the scheme (inclusive of government top-up grant) | 15,913 | 14,753 | (658) | (643) | (393) | (429) | ||
Retirement benefits payable to pensioners | 770 | 745 |
Pension Assets and Liabilities Recognised in the Balance Sheet
Reconciliations of the amounts included in the Balance Sheet arising from the authority’s obligation in respect of its defined benefit plans:
Reconciliation of Present Value of the Scheme Liabilities (Defined Benefit Obligation)
Unfunded Liabilities: Firefighters' Pension Scheme 1992 £'000 | Unfunded Liabilities: Firefighters' Pension Scheme 2006 £'000 | Unfunded Liabilities: Firefighters' Pension Scheme 2015 £'000 | Unfunded Liabilities: Firefighters' Compensation Scheme £'000 | |||||
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2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | |
Opening balance at 1 April | (457,311) | (443,542) | (47,760) | (50,276) | (7,330) | (8,613) | (33,317) | (32,852) |
Current service cost | (4,266) | (3,841) | (2,834) | (2,874) | (1,099) | (1,133) | (827) | (826) |
Past service cost | (10,836) | (10,514) | (1,188) | (1,249) | (194) | (225) | (800) | (789) |
Contributions from scheme participants | (1,081) | (1,004) | (906) | (966) | (326) | (357) | 0 | 0 |
Remeasurement gains and (losses): | ||||||||
- Actuarial gains / losses arising from changes in demographic assumptions | 7,976 | 0 | 895 | 0 | 127 | 0 | 606 | 0 |
- Actuarial gains / losses arising from changes in financial assumptions | 7,416 | (70,490) | 1,473 | (16,328) | 276 | (3,356) | 716 | (7,185) |
- Experience gains / losses on defined benefit obligations | 0 | 5,160 | 0 | 248 | 0 | 173 | 0 | 191 |
Benefits paid net of transfers (in) / out | 16,994 | 15,756 | 248 | 323 | (67) | (72) | 770 | 745 |
Closing balance at 31 March | (443,542) | (508,475) | (50,279) | (71,348) | (8,613) | (13,583) | (32,852) | (40,716) |
Reconciliation of Present Value of the Scheme Liabilities (Defined Benefit Obligation) Local Government Pension Scheme:
£'000 2019 / 20 | £'000 2020 / 21 | |
---|---|---|
(57,049) | Opening balance at 1 April | (53,271) |
(1,967) | Current service cost | (2,335) |
(624) | Past service cost | (10) |
0 | Settlements | (1,894) |
(1,357) | Interest cost | (1,152) |
(348) | Contributions from scheme participants | (367) |
Remeasurement gains and (losses): | ||
1,038 | - Actuarial gains / losses arising from changes in demographic assumptions | 596 |
6,789 | - Actuarial gains / losses arising from changes in financial assumptions | (17,215) |
(1,799) | - Experience gains / losses on defined benefit obligation | 614 |
2,024 | Benefits paid net of transfers (in) / out | 1,467 |
22 | Unfunded pension payments | 23 |
(53,271) | Closing balance at 31 March | (73,544) |
Reconciliation of the Movements in the Fair Value of the Local Government Pension Scheme Assets
£'000 2019 / 20 | £'000 2020 / 21 | |
---|---|---|
34,027 | Opening fair value of scheme assets | 30,764 |
810 | Interest income | 579 |
0 | Settlements | 1,104 |
Remeasurement gain / (loss): | ||
(3,101) | - The return on plan assets, excluding the amount included in the net interest expense | 6,231 |
(413) | - Other actuarial gains / (losses) | 0 |
1,131 | Contributions from employer | 1,555 |
348 | Contributions from employees into the scheme | 367 |
(2,024) | Benefits paid (including unfunded benefits) | (1,490) |
(14) | Administration expenses | (15) |
30,764 | Closing fair value of scheme assets | 39,095 |
Local Government Pension Scheme assets comprised:
Fair value of scheme assets at 31 March 2020 | Fair value of scheme assets at 31 March 2021 | |||||
---|---|---|---|---|---|---|
£'000 | % Quoted | % Unquoted | £'000 | % Quoted | % Unquoted | |
Equities: | ||||||
6,701 | 22% | 1% | - UK investments | 10,004 | 25% | 1% |
10,097 | 33% | - Overseas investments | 14,146 | 37% | ||
957 | 3% | - Private equity investments - unspecified origin | 25,322 | 62% | 3% | |
Gifts: | ||||||
1,278 | 4% | - UK fixed interest gifts | 1,314 | 3% | ||
1,278 | 4% | Gifts subtotal | 1,314 | 3% | ||
Other Bonds | ||||||
1,075 | 4% | - UK corporate bonds | 660 | 2% | ||
1,752 | 6% | - Overseas corporate bonds | 2,020 | 5% | ||
2,827 | 9% | Bonds subtotal | 2,680 | 7% | ||
4,587 | 15% | Property | 3,994 | 10% | ||
1,254 | 4% | Cash / temporary investments | 1,778 | 5% | ||
1,149 | 4% | Inflation-linked pooled fund | 1,892 | 5% | ||
1,914 | 6% | Infrastructure | 2,114 | 5% | ||
30,764 | 68% | 32% | Total | 39,094 | 72% | 28% |
Further information about the Fund's assets can be obtained from the Pension Fund Annual Report, which can be accessed online at www.nottspf.org.uk (Opens in a new window).
Basis for Estimating Assets and Liabilities
Liabilities have been assessed on an actuarial basis using the projected unit credit method, an estimate of the pensions that will be payable in future years dependent on assumptions about mortality rates, salary levels etc. The liabilities of the Local Government Pension Scheme and the Firefighters' schemes have been assessed by Barnett Waddingham Public Sector Consulting and Mercer Limited respectively, both of whom are independent firms of actuaries.
The most recent full actuarial valuations for the Local Government Pension Scheme and the Firefighters' schemes were carried out at 31 March 2019 and 31 March 2018 respectively. Both firms of actuaries have adopted a roll-forward approach to updating the net liabilities as at 31 March 2021. This approach takes into account the cashflows paid into and out of each scheme before taking into consideration any changes in assumptions.
The rate of interest used to discount the post-employment benefit obligations is based on the market yields at the reporting date on high quality corporate bonds of equivalent currency and term to the scheme liabilities. In assessing the liabilities for retirement benefits at 31 March 2021 Barnett Waddingham has used a discount rate of 2.00% for the Local Government Pension Scheme (compared with 2.35% at 31 March 2020), and Mercer Ltd has used a rate of 2.1% for the Firefighters' Schemes (compared with 2.4% at 31 March 2020).
The principal assumptions used by the actuaries in their calculations were:
Local Government Pension Scheme | Firefighters' Schemes 1992, 2006 and 2015 | Firefighters' Compensation Scheme | ||||
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2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | 2019 / 20 | 2020 / 21 | |
Mortality assumptions: | ||||||
Longevity at 65 for current pensioners (LGPS) and at 60 for current pensioners (FF Schemes): | ||||||
- Men | 21.8 | 21.6 | 26.2 | 26.3 | 23.6 | 23.7 |
- Women | 24.4 | 24.3 | 28.3 | 28.4 | 25.7 | 25.8 |
Longevity at 65 for future pensioners (LGPS) and at 60 for future pensioners (FF Schemes): | ||||||
- Men | 23.2 | 22.9 | 28.5 | 28.6 | 25.8 | 25.9 |
- Women | 25.8 | 25.7 | 30.5 |
30.7 |
27.9 | 28 |
Rate of inflation (CPI) | 1.85% | 2.85% | 2.10% | 0.00% | 2.10% | 0.00% |
Rate of increase in salaries | 2.85% | 3.85% | 3.60% | 0.00% | 3.60% | 0.00% |
Rate of increase in pensions | 1.85% | 2.85% | 2.20% | 0.00% | 2.20% | 0.00% |
Rate of revaluation of CARE pensions (2015 Scheme only) | 3.35% | 0.00% | ||||
Rate for discounting scheme* | 2.35% | 2.00% | 2.40% | 0.00% | 2.40% | 0.00% |
*The discount rate is determined by reference to market yields at the end of the reporting period on high quality corporate bonds.
The estimation of the defined benefit obligations is sensitive to the actuarial assumptions set out in the table above. The sensitivity analyses below have been determined based on reasonable possible changes of the assumptions occurring at the end of the reporting period and assumes for each change that the assumption analysed changes while all other assumptions remain constant. This approach is not necessarily realistic, since some assumptions are related: for example, if inflation were to increase it might be reasonable to expect that nominal yields on corporate bonds will increase also. However, it enables the reader to isolate one effect from another. The methods and types of assumptions used in preparing the sensitivity analysis below did not change from those used in the previous period.
Sensitivity analysis for the Firefighters’ Schemes
Firefighters' Schemes | ||
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Impact on the defined benefit liability £'000 | Impact on the projected service cost £'000 | |
Increase discount rate by 0.1% p.a. | -11,684 | -256 |
Increase inflation by 0.1% p.a. |
11,838 |
262 |
Increase pay growth by 0.1% p.a. | 2.314 | 59 |
Increase life expectancy by 1 year | 20,735 | 331 |
Sensitivity analysis for the LGPS
LGPS | ||
---|---|---|
Impact of an increase of +0.1% / +1 year* £'000 | Impact of an decrease of -0.1% / -1 year* £000 | |
Adjustment to discount rate: | ||
Impact on the defined benefit liability | -1,619 | 1,657 |
Impact on the projected service cost | -75 | 77 |
Adjustment to long term salary increase: | ||
Impact on the defined benefit liability | 195 | -195 |
Impact on the projected service cost | 1 | -2 |
Adjustment to pension increases and deferred revaluations: | ||
Impact on the defined benefit liability | 1,446 | -1,414 |
Impact on the projected service cost | 76 | -74 |
Adjustment to mortality age rating assumption*: | ||
Impact on the defined benefit liability | 3,275 | -3,133 |
Impact on the projected service cost | 120 | -116 |
Asset and Liability Matching Strategy
The Local Government Pension Scheme does not use any asset and liability matching strategies to manage risk. The Pension Fund Annual Report details the nature and extent of risks arising from financial instruments, and the Fund’s Risk Management Strategy and Risk Register details the measures taken to mitigate those risks. These documents are available at www.nottspf.org.uk (Opens in a new window).
Impact on the Authority’s Cash Flows
The defined benefit liability shows the underlying commitments that the Authority has in the long run to pay retirement benefits. The total liability of £669m has a substantial impact on the net worth of the Authority as recorded in the Balance Sheet, however statutory arrangements for funding the deficit mean that the financial position of the Authority remains healthy:
- The net liability on the Local Government Pension Scheme will be made good by increased contributions over the remaining working life of employees (i.e. before payments fall due), as assessed by the scheme actuary. The aims of the Fund are to keep employer contribution rates as constant as possible. Contributions are set every three years as a result of the actuarial valuation of the Fund required by the Regulations. The next actuarial valuation of the Fund will be carried out as at 31 March 2022 and will set contributions for the period from 1 April 2023 to 31 March 2026. There are no minimum funding requirements in the LGPS but the long term funding objective is for the Fund to achieve and then maintain sufficient assets to cover 100% of projected accrued liabilities.
- Finance is only required to be raised to cover firefighter pensions when the pensions are actually paid, and any shortfalls are currently met by the Home Office.
- Finance is only required to be raised to cover the costs of the firefighters’ compensation scheme when the pensions are actually paid, and these costs are included in the Authority’s annual budget. The amount spent in 2020/21 was £745k.
The total contributions expected to be made by the Authority to the Local Government Pension Scheme in the year to 31 March 2022 is £977k. The total expected contributions for the Firefighters’ Pension Schemes and Compensation Scheme are £14.4m inclusive of government top-up grant.
The weighted average duration of the defined benefit obligation for Local Government Pension Scheme Members is 23 years. The weighted average durations of the defined benefit obligations of the 1992 FPS, 2006 NFPS, 2015 FPS and the Firefighters’ Compensation Scheme are 17 years, 29 years, 32 years and 22 years respectively.