Isio’s 2025 LGPS valuation predictions

The 2025 LGPS valuation (for England and Wales) is now officially underway! The outcome of this valuation will determine employer contributions from 2026 to 2029.

Isio’s Low-Risk Index shows that, in aggregate, the LGPS’s underlying funding level has improved from 67% at 31 March 2022 to 125% at 31 December 2024, so what good news can employers expect from the 2025 valuation?

Here are our three predictions...

Prediction #1:

Many will see contributions reductions (but not everyone and not enough)

The Low-Risk Index is an indication of underlying funding level changes, but the LGPS typically smooths out short-term ups and downs with the long-term in mind, and so the Index only paints part of the picture.

Crucially, each LGPS Fund will form their own view on employer contributions, taking into account:

• The assets held by the Fund*
• The actuarial advisory firm (each has a different house view)
• The appropriate level of prudence and appetite for change
• The interpretation of the regulatory requirement for the “desirability of stability of the primary contribution rate”.

All of these factors create a “postcode lottery” for employer contribution changes. However, across the board we predict that not enough of the underlying improvements will feed into lower contributions.

*Although the Government Actuary’s Department’s analysis of the 2022 LGPS valuation found no strong link between discount rate and assets held – suggesting that the other factors may have greater influence.

Prediction #2:

Investment de-risking will become more available

The improvement in the underlying LGPS funding level can be seen as an opportunity to reset LGPS risk appetite – from both the Fund and employer perspectives.

Managing employer risks in the LGPS has typically involved increasing employer contributions, resulting in a greater funding “buffer”. For example, this could be an adjustment to the current approach (e.g. discount rate is lower, required probability of success is higher), or you might see surplus buffers and new recovery periods introduced.

However, employers paying more contributions doesn’t really remove much risk. A much more tangible way to reduce risk is through investment de-risking.

Investment de-risking will be a hot-topic for the 2025 LGPS valuation – whether this is LGPS Funds changing their overall strategy or providing their employers with access to an alternative low-risk investment strategy (which some already do).

If you haven’t considered your investment risk given the significant funding improvements, we recommend you do. Also see our article: 8 reasons to consider employer-specific investment strategies

Prediction #3:

Continued (and perhaps misplaced?) focus on employer covenant

The 2022 LGPS valuation saw a growing number of LGPS Funds incorporate the strength of employer covenant when determining contribution rates, particularly for those without government backing or guarantees (e.g. tier 3 employers such as charities, universities and housing associations). We expect this to continue for the 2025 LGPS valuation.

However, in the context of the significantly improved market conditions, this could be misplaced.

As actuaries, when we consider risk, we need to look at the likelihood of a risk event and the impact if the risk occurs.  A covenant review will typically look to form a view on the likelihood of a risk event (in this case, employer default or insolvency). But with most LGPS Funds and employers expected to be over 100% funded on the underlying low-risk basis, the risk impact is expected to be a nil (or even a net positive).

That’s not to say monitoring employer covenant is not important, but for this valuation we think the focus should be less on employer strength and more on employer needs. In these challenging times, what can an employer do with the savings from reduced contributions and how can this contribute to better outcomes?

Bonus prediction:

Those who engage effectively with their LGPS fund will get a much better 2025 LGPS valuation outcome

As a single employer in a multi-employer fund, it can feel like an uphill battle to make a difference. However, we are starting to see an increased awareness from the LGPS of the importance of employers’ perspectives. We are also seeing more employers within a fund work together to increase their influence.

An important practical point is that funds are on tight timescales and so it is important to engage as soon as possible.

However, if you don’t engage with your LGPS Fund, your likelihood of getting a better outcome is a lot lower.