This Appendix sets out further information on the data used and methodologies adopted in preparing Prudence Watch.

Data

The calculations are based on each Fund’s actuarial valuation reports available publicly.

Methodology

In calculating the Prudence measure a number of calculations are needed.

Standardised low-risk funding position:

Based on the Fund wide ongoing funding position shared in the valuation report we calculate the Fund’s funding position on a standardised low-risk basis:

The “low-risk” funding basis adopted is based on the following assumptions

• A discount rate used to value liabilities in line with fixed interest government bond yields at the valuation date 31 March 2025 (at an appropriate duration)
• Pension increases based on break-even Retail Price Inflation rates at the valuation date 31 March 2025 (at an appropriate duration) with an appropriate deduction for an inflation risk premium to reflect distortions in bond markets, and a deduction to reflect the differences in construction between Retail Price Inflation, and Consumer Price Inflation (CPI) which drives pension increases in the LGPS
• Salary increases are set based on an average premium relative to CPI as seen across LGPS Funds for the 2025 valuation
  o The longevity and other demographic assumptions remain the same as those adopted by the Fund for the ongoing valuation as the impact of any difference between Fund is considered less material
• Duration information is taken from information included in the valuation reports, or estimated where sufficient information isn’t available.

There are other views of what a “low-risk” basis may be. The basis we have adopted is used as an illustration of a set of assumptions where an investment strategy could be designed such that if fully funded there is a very low likelihood any future deficit would arise for past service liabilities. The aim is for a standardised approach across the Funds.

Where fund-specific details are unavailable within the information received, reasonable assumptions have been made.

The asset value remains in line with that used for the ongoing valuation results. For employers in Funds advised by Barnett Waddingham we understand that assets values are smoothed over the six month period around the valuation date for the purpose of the ongoing valuation. We do not believe this will be material to the estimates shown.

Standardised low-risk primary contribution rate:

A low-risk primary rate is calculated adopting the same low-risk basis outlined above.

• For Funds where Aon, Barnett Waddingham or Mercer are the scheme actuary, Isio’s calculation is based on the Fund wide primary rate noted in the valuation report. This is switched onto the low-risk set of assumptions
• For Funds where Hymans Robertson are the scheme actuary, given we are unable to replicate the approach used to calculate the primary contribution rate an alternative approach has been adopted. Here Isio has made an assumption for all Fund’s on their low-risk primary rate. This reflects various considerations including the Fund’s demographics and average age, market conditions at the valuation date, and the low-risk rates seen across the other Funds at the valuation date.

The total low-risk contribution rate is calculated as the low-risk primary rate plus any adjustment to allow for the low-risk surplus / deficit to be spread over 20 years.

Prudence Watch Score

The Prudence Watch Score determines how much additional investment return is needed above the government bond yield used for the low-risk basis to replicate the Fund’s total contribution rate. It is the contribution rate for the year starting 1 April 2026 that is considered and doesn’t reflect how this may change over the three-year period.

To do this we calculate the adjusted funding position and adjusted primary rate from the low-risk positions calculated above to allow for this additional level of investment return in the discount rate assumption.

The level of additional return is then calculated such that the total contribution on this basis is in line with the Fund wide total contribution rate. This reflects both the primary rate on this basis, plus any adjustment for the surplus/deficit on this basis spread over 20 years.

Reliances and limitations

The numerical information has been calculated using approximate methods and has been provided for information purposes only. It should not be considered as advice or be relied upon in making any financial decisions.

This work is compliant with the Technical Actuarial Standard TAS 100 published by the Financial Reporting Council, so far as their requirements are material for this.