West Yorkshire Pension Fund - Funding strategy statement (FSS)

Funding strategy statement (FSS)

1. Introduction

1.1 The Local Government Pension Scheme (England and Wales) (Amendment) Regulations 2004 provide the statutory framework from which the Administering Authority is required to prepare a FSS. The key requirements for preparing the FSS can be summarised as follows:

After consultation with all relevant interested parties involved with the Fund, the Administering Authority will prepare and publish their funding strategy;

In preparing the FSS, the Administering Authority must have regard to:
- the guidance issued by CIPFA for this purpose; and
- the Statement of Investment Principles (SIP) for the Scheme published under Regulation 12 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 (as amended); and
The FSS must be revised and published in accordance with Regulation 35 of the Local Government Pension Scheme (Administration) Regulations 2008 (as amended), "the Admin Regulations" whenever there is a material change in either the policy on the matters set out in the FSS or the SIP.

1.2 fits payable under the Local Government Pension Scheme (LGPS) are guaranteed by statute and thereby the pension promise is secure. The FSS addresses the issue of managing the need to fund those benefits over the long term, whilst at the same time facilitating scrutiny and accountability through improved transparency and disclosure.

1.3 The LGPS is a defined benefit final salary scheme under which the benefits are specified in the governing legislation (the Local Government Pension Scheme (Benefit, Membership and Contributions) Regulations 2007 (as amended), "the Benefit Regulations"). The required levels of employee contributions are also specified in the Benefit Regulations.

1.4 Employer contributions are determined in accordance with the Admin Regulations which require that an actuarial valuation be completed every three years by the actuary, to include a rates and adjustments certificate. Contributions to the Fund from employers should be set so as to "secure its solvency", whilst the actuary must also have regard to the desirability of maintaining as nearly constant a rate of contribution as possible. The actuary must have regard to the FSS in carrying out the valuation.

2. Purpose of Funding Strategy Statement (FSS)

2.1 Funding is the making of advance provision to meet the cost of accruing benefit promises. Decisions taken regarding the approach to funding will, therefore, determine the rate or pace at which this advance provision is made. Although the regulations specify the fundamental principles on which funding contributions should be assessed, the implementation of the funding strategy is the responsibility of the Administering Authority, acting on professional advice provided by the actuary.

2.2 The purpose of this FSS is:

to establish a clear and transparent fund-specific strategy which will identify how employers' pension liabilities are best met going forward;
to support the regulatory requirement to maintain as far as possible stable employer contribution rates;
to take a prudent longer-term view of funding those liabilities.

2.3 It should be stressed at the outset that as referred to in 2.2 ii) above, a key priority for WYPF would be to bring stability to employers' contribution rates through gradual increases (or decreases) phased in over a number of years. Views will be taken on what is reasonable and appropriate for employer contribution rates and, therefore, associated periods for recovery of deficits or return of surpluses. The administering authority will adopt assumptions which, in its judgment based on actuarial advice received, are likely to deliver the funding target.

2.4 The intention is for this strategy to be both cohesive and comprehensive for the Fund as a whole, recognising that there will be conflicting objectives which need to be balanced and reconciled. Whilst the position of all employers will be referred to in the FSS, the FSS must remain a single strategy for the Administering Authority to implement and maintain.

3. Aims and Purpose of the Pension Fund

3.1 The aims of the Fund are to:

ensure that employer contribution rates are kept as stable as possible, whilst ensuring the solvency of the Fund. There must be a balance between these two potential conflicting priorities, and a point at which a compromise is reached;
manage how employers' liabilities are met effectively through the employers' contributions, including additional contributions for early retirement strain;
ensure year on year there will always be sufficient resources available to meet liabilities as they fall due. The Fund has a significant positive cash flow in terms of income received offset by monies payable; and
maximise the returns from investments within reasonable risk parameters.

3.2 The purpose of the Fund is to:

receive monies in respect of contributions from employers and employees, transfer values and investment income; and
pay out monies in respect of pension benefits, together with transfer values payable, and the costs of pension administration and investment management.

4. Responsibilities of Key Parties

4.1 The sound management of the Fund relies on all interested parties exercising their duties and responsibilities conscientiously and diligently. The key parties in this statement are the Administering Authority, individual employers and the actuary.

4.2 The Administering Authority should:

4.2.1 collect contributions
4.2.2 invest all monies held in accordance with the SIP
4.2.3 maintain adequate records for each Scheme member
4.2.4 exercise discretions within the regulatory framework, taking into account the cost of decisions
4.2.5 ensure sufficient cash is available to meet liabilities as they fall due
4.2.6 pay benefits and transfer values in accordance with regulations, and advice of the actuary
4.2.7 provide membership records and financial information to the actuary promptly when required
4.2.8 prepare and maintain a Funding Strategy Statement and a Statement of Investment Principles in consultation with interested parties
4.2.9 monitor all aspects of the Fund's performance and funding
4.2.10 manage the valuation process in consultation with the actuary

4.3 Each individual employer should:

4.3.1 deduct contributions from employees' pay correctly
4.3.2 pay all contributions, including their own as determined by the actuary, and any additional contributions promptly by the due date
4.3.3 exercise discretions within the regulatory framework, taking into account the cost of decisions
4.3.4 make additional contributions in accordance with agreed arrangements in respect of, for example, augmentation of scheme benefits and early retirement strain
4.3.5 provide adequate membership records to the Administering Authority promptly as required
4.3.6 notify the Administering Authority promptly of all changes or proposed changes to membership
4.3.7 notify the Administering Authority promptly of possible or intended changes that could affect the basis of participation in the Fund which affect future funding; and
4.3.8 be aware that responsibility for compensatory added years, which the Administering Authority pays on behalf of the employer as a paying agent, lies with the employer which awards and is recharged for the cost of compensatory added years

The Fund Actuary

4.4 The fund actuary should:

4.4.1 prepare triennial valuations including the setting of employers' contribution rates after agreeing assumptions with the Administering Authority and having regard to the FSS; and
4.4.2 prepare advice and calculations in connection with bulk transfers and individual benefit-related matters

5. Solvency Issues and Target Funding Levels

The Funding Principle

5.1 To meet the requirements of the Regulations the Administering Authority's long term funding principle is for the Fund to achieve and then maintain sufficient assets to cover 100% of the promised benefits.

Funding Targets and assumptions regarding future investment strategy

5.2 The funding target is the amount of assets which the Fund needs to hold at any point in time such that the funds held, plus future anticipated investment returns on those funds, plus future contributions, and taking into account the anticipated future experience of the membership, meet the funding principle.

Orphan liabilities

5.3 These are liabilities with no access to funding from any employer in the Fund. To minimise the risk to other employers in the Fund the assets notionally related to these liabilities will be assumed to be invested in low risk investments. This is described in more detail later in this document.

Solvency

5.4 The Fund is deemed to be solvent when the assets are equal to or greater than 100% of the Funding Target.

5.5 The strategic aim of the Fund is to operate within a Funding range of 90% to 110%. Whenever the Fund as a whole is operating within this range of funding then for the majority of 'high covenant' employers it is anticipated that their contribution rates will remain stable. If the funding level of those individual employers is between 90% and 110% then it is unlikely that a change in those employers' contribution rates will be considered. For other employers the Administering Authority will have regard to the potential for participation to cease, and require changes in contribution rates accordingly.

Determination of the funding target and recovery period

5.6 The Fund has a target of achieving the Funding Target within a maximum period of 22 years, which is considered to be a prudent period in the context of providing for pension liabilities in the public sector. This is based on the assumption that the Scheme will continue for the foreseeable future, and that favourable investment performance can play a valuable role in achieving adequate funding over the long term.

5.7 As part of each valuation separate employer contribution rates are assessed by the actuary for each participating employer or group of employers. These rates are assessed taking into account the experience and circumstances of each employer, following a principle of no cross-subsidy between the various employers in the Scheme. In attributing the overall investment performance obtained on the assets of the Scheme to each employer a pro-rata principle is adopted.

5.8 The Administering Authority, following consultation with the participating employers, has adopted the following constraints for setting the individual employer contribution rates:

5.8.1 a maximum deficit recovery period of 22 years will apply. Employers will have the freedom to adopt a recovery plan on the basis of a shorter period if they so wish. A shorter period may be applied in respect of particular employers where the Administering Authority considers this to be warranted (see Deficit Recovery Plan below).
5.8.2 where changes in employer contribution rates are required following completion of the actuarial valuation, the increase or decrease may be implemented in steps.
5.8.3 on the cessation of an Admission Body's participation in the Scheme, the actuary will be asked to complete a termination valuation. Any deficit in the Scheme in respect of the employer will be due to the Scheme as a termination contribution, unless it is agreed by the Administering Authority and the other parties involved that the assets and liabilities relating to the employer will transfer within the Scheme to another participating employer. Details of the approach to be adopted for such an assessment on termination are set out in the separate Admission Bodies Policy document at Appendix 2.

5.9 In determining the Funding target and recovery period the Administering Authority has had regard to:

5.9.1 the responses to the consultation with employers on the FSS principles;
5.9.2 relevant guidance issued by the CIPFA Pensions Panel;
5.9.3 the need to balance a desire to attain the target as soon as possible against the short-term cash requirements which a shorter period would impose;
5.9.4 the Administering Authority's views on the strength of the participating employers' covenants in achieving the objective.

Deficit Recovery Plan

5.10 If the assets of the scheme relating to an employer are less than the funding target at the date of any actuarial valuation, a recovery plan will be put in place, which requires additional contributions from the employer to meet the shortfall. Each employer will be informed of its deficit to enable it to make the necessary allowance in their business and financial plans.

5.11 Additional contributions will be expressed as a monetary amount, and will increase annually in line with the assumptions used for the valuation. The recovery period for which the additional contributions are payable will normally be subject to the following limits:

5.11.1 scheduled, resolution and bodies with subsumption rights - 22 years
5.11.2 admission bodies with a fixed or known term of participation - remaining period of participation
5.11.3 other admission bodies - future working life of members

5.12 In determining the actual recovery period to apply for any particular employer, the Administering Authority may take into account, without limitation, the following factors:

5.12.1 the type/group of the employer
5.12.2 the size of the funding shortfall;
5.12.3 the business plans of the employer;
5.12.4 the assessment of the financial covenant of the employer;
5.12.5 any contingent security available to the Fund or offered by the employer such as guarantor or bond arrangements, charge over assets, etc.

The Normal Cost Of The Scheme (Future Service Contributions)

5.13 In addition to any contributions required to rectify a shortfall of assets below the funding target, contributions will be required to meet the cost of future accrual of benefits for members after the valuation date (the "normal cost"). The method and assumptions for assessing these contributions are also set out in Appendix 1.

Smoothing of Contribution rates for admission bodies

5.14 The Administering Authority recognises that a balance needs to be struck as regards the financial demands made of admission bodies. On the one hand, the Administering Authority requires all admission bodies to be fully self funding, such that other employers in the Fund are not subject to expense as a consequence of the participation of those admission bodies. On the other hand, requiring full funding may precipitate failure of the body in question, leading to costs for other participating employers.

5.15 The renewed Compact is an agreement between the Coalition Government, and their associated Non-Departmental Public Bodies, Arms Length Bodies and Executive Agencies, and civil society organisations (which for the purpose of the Compact include charities, social enterprises, voluntary and community groups). The agreement aims to ensure that the Government and civil society organisations work effectively in partnership to achieve common goals and outcomes for the benefit of communities and citizens.

5.16 Where the Administering Authority considers it necessary to relax the requirement that the contribution rate targets full funding temporarily, taking account of its responsibilities under the Compact, the Administering Authority will engage with the largest employers in the Fund with a view to seeking agreement to this approach.

5.17 The implication of this is that, during the period of relaxation, contribution rates for admission bodies can be set at a level lower than full funding would require.

Former Participating Bodies

5.18 Where an employer ceases to participate in the Fund, the Administering Authority will obtain a cessation valuation from the actuary which will determine a cessation contribution on the assumption that, unless a subsumption arrangement is in place, the assets invested in low risk investments will be sufficient to meet the liabilities. This approach minimises the risk that a deficiency could arise on these liabilities which would incur a cost for the other employers in the Fund.

5.19 The distribution of the investment portfolio between asset classes, and the allocation of investment performance, will be exactly the same for every employer in the Fund. The Fund has one investment portfolio, and employers' shares of the portfolio will be pro-rata to their participating share of the Fund. The Fund's Investment Advisory Panel approves the distribution of the investment portfolio between the various asset classes, and no separate or different notional distribution will be applied to any employer

5.20 With regard to the funding for early retirement costs, all employers are required to make capital payments to the Fund to cover the costs of early retirements. The ability to spread the capital payments over 5 years for each early retirement is available to employers, although interest is chargeable.

5.21 Two key principles making up the funding strategy and to be adopted for the 2010 actuarial valuation are:

5.21.1 to provide stability in employer contribution rates as far as is possible, thereby avoiding wide fluctuations year on year in those rates. To achieve this stability and ensure gradual movements in employers' contribution rates, the practice of phasing any increases or decreases in employers' rates from 1 April 2011 will be adopted where appropriate and required. Phasing will normally be over a 3 year period but in some circumstances a maximum period of 12 years can be granted;
5.21.2 to retain a maximum 22 year recovery period for meeting a deficit as adopted at the 2007 Valuation

5.22 With regard to the two principles outlined in paragraph 5.21 above, every Scheme Employer (i.e. those identified in paragraph 5.11.1) will have the option of being treated on this basis. They may, however, choose to have i) a single increase in contribution rates rather than on an incremental basis that phasing would imply, or ii) a phasing of any increase over fewer years than can be granted.

5.23 It may not be possible to adopt the two principles outlined in paragraph 5.21 for some or all of the employers identified in paragraphs 5.11.2 and 5.11.3), although wherever possible they will be applied. Individual decisions may have to be taken for each employer featuring in these two groups with regard to an appropriate recovery period and whether the phasing of increases / decreases in contribution rates is feasible. Decisions on these issues will have regard to the Administering Authority's views on the strength of an employer's covenant, to its membership profile, and to its anticipated future period of participation in the Fund.

5.24 In adopting the 22 year deficit recovery period for the 2010 Valuation, the Administering Authority has had regard to the need to balance the short-term reduced cash requirement which the 22 year recovery period would deliver against the desire to attain a target of 100% funding as soon as possible, within the 90% to 110% funding range.

6. Link to investment policy set out in the Statement of Investment Principles (SIP)

6.1 In assessing the value of the Fund's liabilities in the valuation, allowance has been made for asset out-performance allowance, as described in Appendix 1, which takes into account the investment strategy adopted by the Fund, as set out in the SIP.

6.2 It is possible to construct a portfolio that closely matches the liabilities and represents the least risk investment position. Such a portfolio would consist of a mixture of long-term index-linked and fixed interest gilts.

6.3 Investment of the Fund's assets in line with the least risk portfolio would minimise fluctuations in the Fund's ongoing funding level between successive actuarial valuations. However, if, at the valuation date, the Fund had been invested in this portfolio, then in carrying out the valuation it would not be appropriate to make any allowance for out-performance of the investments. On this basis the assessed value of the Fund's liabilities valuation would be significantly higher, and the declared funding level would be correspondingly reduced

6.4 Departure from a least risk investment strategy, in particular to include a significant element of Equity investment, gives the prospect that out-performance by the assets will, over time, reduce the employers' contribution requirements. The funding target might in practice therefore be achieved by a range of combinations of funding plan, investment strategy and investment performance.

6.5 The Fund's current benchmark investment strategy, as set out in its SIP, is that the biggest proportion of the Fund's investments will be in Equities. This type of investment bias is intended to maximise growth in the value of assets over the long term. The expected rate of return and the target set for investment returns in the SIP are reviewed annually as a matter of course, and the relationship with the requirements of the FSS are considered at the same time.

7. Identification of risks and counter-measures

7.1 Risks are considered in four categories, financial, demographic, regulatory and governance.

7.2 The financial risks to the Fund relate to the discount rate (the expected rate of return on investments) and inflation, in respect of both pay and prices. The return on investments may fall below expectations for two reasons, first that markets fail to perform in line with assumptions, and second that the investment managers fail to achieve performance targets over the long term.

7.3 The Fund mitigates these risks through diversification, permitting investment in a wide variety of markets and assets, and through the use of specialist managers with differing mandates in addition to the internal investment management team, which has a wide variety of experience within its members.

7.4 The performance of both markets and managers is reviewed regularly by the Investment Advisory Panel, which has the appropriate skills and training required to undertake this task.

7.5 Demographic risks are considered in two categories, further increases in longevity and variations in employment patterns.

7.6 Any further increases in longevity will become apparent gradually over time, and therefore will be satisfactorily addressed in each succeeding valuation.

7.7 Variations in employment patterns are an issue for Fund employers, where managing the age profile of the workforce, early retirement, redundancies and ill health retirement all have an effect in the valuation.

7.8 Regulatory risks to the scheme arise from changes to the scheme regulations, taxation, national changes to pension requirements, or employment law.

7.9 The Fund will normally respond to consultations on these matters where they have an impact on the Fund, and it would encourage employers, who frequently have a greater interest in proposed changes, to respond independently.

7.10 Governance risk is essentially one of communication between employer and the Fund, where, for example, an employer fails to inform the Fund of major changes, such as the letting of a contract involving the transfer of significant numbers of staff to another employer, or an admission body closing the scheme to new entrants.

7.11 The Fund seeks to maintain regular contact with employers to mitigate this risk, and has appointed liaison officers for this purpose. The Fund would also advise employers to consider past service deficit payments as lump sums, rather than as a percentage of payroll, to avoid an under payment accruing as a result of a reduction of the payroll.

7.12 To protect the Fund on the admission of a new employer, the existing scheme employer (which should liaise with the Fund) or the Fund if there is no existing scheme employer, will undertake a risk assessment and determine the requirement for a bond or indemnity, which should be reviewed annually.

7.13 The Fund will monitor employers with a declining membership, and may introduce a more conservative Funding strategy for such employers.

8. Monitoring and Review

8.1 The Administering Authority has taken advice from the Fund Actuary in preparing this Statement, and will consult with senior officials of all the Fund's participating employers.

8.2 A full review of this Statement will occur no less frequently than every three years, to coincide with completion of a full valuation. Any review will take account of the current economic conditions and will also reflect any legislative changes.

8.3 The Administering Authority will monitor the progress of the funding strategy between full actuarial valuations. If considered appropriate, the funding strategy will be reviewed (other than as part of the triennial valuation process), for example:

if there has been a significant change in market conditions, and/or deviation in the progress of the funding strategy.
if there have been significant changes to the Scheme membership, or LGPS benefits.
if there have been changes to the circumstances of any of the employing authorities to such an extent that they impact on or warrant a change in the funding strategy
if there have been any significant special contributions paid into the Scheme.

APPENDIX 1

Actuarial Valuation as at 31 March 2010

Method and assumptions used in calculating the funding target

The actuarial method to be used is the Projected Unit method, under which the salary increases assumed for each member are projected until that member is assumed to leave active service by death, retirement or withdrawal from service.

Principal assumptions

Investment return (discount rate)

A yield based on market returns on the Bank of England Bond Curve for durations up to 25 years and an extrapolation of that curve for durations in excess of 25 years which reflects a market consistent discount rate for the profile and duration of the Scheme's accrued liabilities, plus an Asset Out-performance Assumption ("AOA") of 2.65%p.a. for the periods pre and post retirement with the exception of Admission Bodies which will ultimately give rise to Orphan liabities where the pre-retirement AOA will be 1.75% (in service) and 0.25% (left service) and the post-retirement AOA will be 0.25%.

The asset out-performance assumptions represent the allowance made for the long-term additional investment performance on the assets of the Fund relative to the Bank of England Bond Curve as at the valuation date.

Inflation (Retail Prices Index)

The inflation assumption will be taken to be the investment market's expectation for inflation as indicated by the difference between yields derived from market instruments, principally conventional and index-linked UK Government gilts as at the valuation date (as indicated by Bank of England Yield Curves), reflecting the profile and duration of the Scheme's accrued liabilities.

Salary increases

The assumption for real salary increases (salary increases in excess of price inflation) will be determined by an allowance of 1.5% p.a. over the inflation assumption as described above.

Pension increases

Increases to pensions are assumed to be in line with the inflation (CPI) assumption. This will be determined as the inflation (RPI) assumption described above, less 0.5%pa. This is modified appropriately to reflect any benefits which are not fully indexed in line with the CPI (e.g. Guaranteed Minimum Pensions in respect of service prior to April 1997).

Mortality

Post-retirement Mortality

Base Rates

Normal Health: Standard SAPS All base tables making allowance for improvements in mortality in line with the CMI 2009 M/F improvement factors to 2010. Ill-health: Standard SAPS Ill-health tables making allowance for improvements in mortality in line with the CMI 2009 M/F improvements factors 2010.

Scaling Factors

Rates adjusted by scaling factors as dictated by Fund experience Males (normal health) 105%
Females (normal health) 105%

Males (ill-health) 105%
Females (ill-healths) 120%

Future improvement to base rate

An allowance for improvements in line with the CMI 2009 M/F improvements with a long term rate of 1.25% p.a.

Pre-retirement mortality

Males: Standard SAPS All lives table scaled by 75%
Females: Standard SAPS All lives table scaled by 75%

Early retirements

All members are assumed to retire at the earliest age at which they can retire as of right, with no reduction to benefits accrued prior to 1 April 2008. Members joining on or after 1 October 2006 are assumed to retire at age 65.

Withdrawals

Allowance made for withdrawals from service.On withdrawal, members are assumed to leave a deferred pension in the Fund and are not assumed to exercise their option to take a transfer value.

Retirement due to ill health

Allowance made for retirements due to ill health. Proportions assumed to fall into the different benefit tiers applicable after 1 April 2008 are:

Tier 1 (upper tier) 70%
Tier 2 (middle tier) 20%
Tier 3 (lower tier) 10%

Family details

A man is assumed to be 3 years older than his spouse, civil partner or cohabite. A woman is assumed to be 3 years younger than her spouse, civil partner or cohabite.
90% of non-pensioners are assumed to be married / cohabitating at retirement or earlier death.
90% of pensioners are assumed to be married / cohabitating at age 65.

Commutation

Each member assumed to exchange 50% of the maximum amount permitted of their past service pension entitlements.

Each member assumed to exchange 75% of the maximum amount permitted of their future service pension entitlements.

Promotional salary increases

Allowance made for age-related promotional increases.

Expenses

0.4% of Pensionable Pay added to the cost of future benefit accrual.

Method and assumptions used in calculating the cost of future accrual

The cost of future accrual (normal cost) will be calculated using the same actuarial method and assumptions as used to calculate the funding target.

Summary of key whole Fund principal financial assumptions used for calculating funding target and cost of future accrual (the "normal cost") for the 2010 actuarial valuation

Discount rate (pre-retirement)	7.15% 6.25 % (ABs in service 4.75% ABs left service)
Discount rate (post-retirement)	7.15% 4.75% (ABs)
Rate of general pay increases	5.3%
Rate of price inflation (RPI)	3.8%
Rate of price inflation (CPI)	3.3%
Rate of pension increases (on benefits in excess of GMPs)	3.3%
Rate of pension increases on post-88 GMPs	2.7%
Rate of deferred pension increases	3.3%
Rate of GMP increases in deferment	5.3%

Assumptions used in calculating contributions payable under the recovery plan

The contributions payable under the recovery plan are calculated using the same assumptions as those used to calculate the funding target.

APPENDIX 2

WEST YORKSHIRE PENSION FUND

Policy on Admission Bodies

1. Background

1.1 Under the Local Government Pension Scheme Regulations, certain employers are allowed to participate in the Fund if they satisfy the relevant criteria set out in the Regulations. These are known as admission bodies.

1.2 There are a number of types of employer which participate in the Fund. Certain employers, such as local authorities are categorised as "Scheme Employers". The employees of Scheme Employers have a statutory right to participate in the Fund.

1.3 An admission body is an employer which satisfies certain criteria and applies to participate in the Fund. It is required to have an "admission agreement" with the Fund. In conjunction with the Regulations, the admission agreement sets out the conditions of participation of the admission body including which employees (or categories of employees) are eligible to be members of the Fund.

2. Types of Admission Body

2.1 There are basically two types of admission bodies.

Transferee admission bodies: An employer which participates in the Fund for employees involved with delivery of a specific function or service for a Scheme Employer. An example is where a local authority outsources a specific service (e.g. waste management) to a private sector employer. In these cases the relevant Scheme Employer would be a party to the admission agreement, as well as the admission body itself and the administering authority.

Community admission bodies: These are the traditional type of admission bodies - bodies who operate in and/or are connected to local government.

They also include admission bodies that are not associated to local government, as follows:

Bodies which provide a public service in the UK otherwise than for the purposes of gain and which have sufficient links with a Scheme Employer to be regarded as having a community of interest.

Bodies which provide a public service in the UK otherwise than for the purposes of gain and which are approved by the Secretary of State to be admitted to the LGPS. Approval may be subject to such conditions as the Secretary of State thinks fit and he may withdraw approval at any time if such conditions are not met.

Bodies to which any Scheme Employer provides funding. Where at the date that the admission agreement is made with such a body the total contribution from any one or more Scheme Employer to its contribution income equals 50% or less of the funding contributed by third parties it must be a term of the admission agreement that the Scheme Employer who provides funding (and, if more than one, all of them) guarantees the liability of the admission body to pay all amounts due from it under the LGPS Regulations.

3 Risks and responsibilities

3.1 For transferee admission bodies (generally admission as a result of a Best Value transfer), the Scheme Employer (i.e. the authority letting the contract) is now required to carry out an assessment of the level of risk on premature termination of the contract. This assessment would normally be based on actuarial advice in the form of a "risk assessment report". Based on this assessment, the Scheme Employer should decide whether or not to require the transferee admission body to provide a bond and if so at what level. Irrespective of whether a bond is required the Regulations require that, in the event of unfunded liabilities on the termination of the admission, the Scheme Employer's contribution rate to the Fund should be revised accordingly. Effectively then the Scheme Employer is the ultimate guarantor for these admissions.

3.2 At present, there is no requirement to carry out a risk assessment, or assess the need for a guarantee or bond, in respect of community admission bodies. However, there is no reason why some form of risk assessment cannot be carried out in relation to any admission body and likewise there is no reason why a bond or guarantee cannot be required if it is thought necessary. Ultimately, a bond or guarantee is designed to protect the Fund in the event that unfunded liabilities are present after the termination of an admission body.

3.3 When an admission agreement comes to its end, or is prematurely terminated for any reason, employees may transfer to another employer, either within the Fund or elsewhere. If this is not the case the employees will retain pension rights within the Fund, either deferred benefits or immediate retirement benefits. Early retirements can, in particular, create a strain on the Fund and so give rise to unfunded liabilities.

3.4 In the event that unfunded liabilities arise that cannot be recovered from the admission body, these will normally fall to be met by the Scheme Employer in the case of transferee admission bodies or the Fund as a whole (i.e. all employers) in the case of community admission bodies. In this latter case the shortfall would normally fall on the employers pro-rata. Alternatively, if a guarantor for the outgoing admission body was also a participant in the Fund, assets, liabilities and the funding deficit could be subsumed by that body within the Fund.

4. Reducing or mitigating risks

4.1 Faced with the potential risks identified above, the administering authority has adopted a variety of policies in entering into admission agreements but the key one is that in the absence of a reliable guarantor or bond, to refuse to enter into an admission agreement. WYPF will however, only consider admission of a body if that body is based wholly or mainly in West Yorkshire or has clear links to an existing Scheme Employer of the Fund and the body has a sound financial standing.

5. Subsumed liabilities

Where an employer is ceasing participation in the Fund such that it will no longer have any contributing members, it is possible that another employer in the Fund agrees to provide a source of future funding in respect of any emerging deficiencies in respect of those liabilities.

In such circumstances the liabilities are known as subsumed liabilities (in that responsibility for them is subsumed by the accepting employer). For such liabilities the Administering Authority will assume that the investments held in respect of those liabilities will be the same as those held for the rest of the liabilities of the accepting employer. Generally this will mean assuming continued investment in more risky investments than Government bonds.

6. Orphan liabilities

Where an employer is ceasing participation in the Fund such that it will no longer have any contributing members, unless any residual liabilities are to become subsumed liabilities, the Administering Authority will act on the basis that it will have no further access for funding from that employer once any cessation valuation, carried out in accordance with Administration Regulation 38, has been completed and any sums due have been paid. Residual liabilities of employers from whom no further funding can be obtained are known as orphan liabilities.

The Administering Authority will seek to minimise the risk to other employers in the Fund that any deficiency arises on the orphan liabilities such that this creates a cost for those other employers to make good the deficiency. To give effect to this, the Administering Authority will seek funding from the outgoing employer sufficient to enable it to match the liabilities with low risk investments, generally Government fixed interest and index linked bonds.

To the extent that the Administering Authority decides not to match these liabilities with Government bonds of appropriate term then any excess or deficient returns will be added to or deducted from the investment return to be attributed to the employer's notional assets.

7. Cessation of participation

Where an Admission Body ceases participation, a cessation valuation will be carried out in accordance with Administration Regulation 38. That valuation will take account of any activity as a consequence of cessation of participation regarding any existing contributing members (for example any bulk transfer payments due) and the status of any liabilities that will remain in the Fund.

In particular, the cessation valuation will distinguish between residual liabilities which will become orphan liabilities, and liabilities which will be subsumed by other employers. For orphan liabilities the Funding Target in the cessation valuation will anticipate investment in low risk investments such as Government bonds. For subsumed liabilities the cessation valuation will anticipate continued investment in assets similar to those held in respect of the subsuming employer's liabilities.

Regardless of whether the residual liabilities are orphan liabilities or subsumed liabilities, the departing employer will be expected to make good the funding position revealed in the cessation valuation. In other words, the fact that liabilities may become subsumed liabilities does not remove the possibility of a cessation payment being required.

January 2011