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KPMG: U.K. local government pension schemes lower deficit by raising discount rates

The deficit of England and Wales’ 89 local government pension scheme funds fell 25.5% to £35 billion ($50.4 billion) for the three years ended March 31, 2016, said KPMG.

The professional services firm said it had anticipated a deficit of around £70 billion, but that the actuaries of LGPS funds had updated their approach to setting discount rates in light of very low long-term gilt yields.

“The change in approach is not necessarily an improvement, it reduces the deficit but it increases the risk members of the scheme are exposed to,” said Steve Simkins, pensions partner at KPMG, in an email. “The discount rates have been increased relative to long-term gilt yields so that the accountants put greater emphasis on the future value of assets rather than the current value — in such tumultuous markets there is absolutely no guarantee the predicted future value will ever be realized.”

The firm’s initial assessment of valuation results found a wide range of assumptions and approaches used by different pension fund actuaries.

KPMG analyzed all 89 LGPS funds in England and Wales and the discount rates they use. These funds have more than £200 billion in assets. Further details on the discount rates were not available.

“The fact that the deficit fell in such difficult market conditions highlights the increasing reliance of the LGPS on the future performance of its assets and this puts employers in a higher risk position. Despite very different assumptions and approaches, outcomes for local authorities are largely consistent but our analysis suggests that other employers are increasingly exposed to a postcode lottery according to the fund they are in and the scheme actuary involved,” said Mr. Simkins in a news release accompanying the data.