Persistently strong LGPS funding suggests the need for a new stable contribution rate

• Isio’s Low-Risk Funding Index reveals the LGPS funding level remained consistently strong through Q3 2024, ending at 112% with a surplus of £44bn
• This strong funding position results from asset values exceeding £410bn for the first time and inflation levels falling
• This month has seen further funding improvements to a new record high of 118% with a surplus of £64bn
• With much improved market conditions now prevailing for over two years, should the LGPS consider setting a new lower “stable contribution rate”?

24 October 2024: The latest release of Isio’s Low-Risk Funding Index reveals the aggregate funding level for the 87 funds participating in the Local Government Pension Scheme (LGPS) in England and Wales has remained at 112% over the period 30 June 2024 to 30 September 2024.

Over the period, further improvements were made to asset values (mainly equities) as well as small reductions to future inflation expectations. These positive changes were offset with falling gilt yields which slightly increased the value of liabilities. Of the 87 participating funds, 69 have funding levels of 100% or higher, with levels ranging from 73% to 168% funded.  

At the previous actuarial valuation date, 31 March 2022, the aggregate low-risk funding position was 67% and none of the 87 funds had a funding level of 100% or higher on a low-risk basis. With only five months to go until the 31 March 2025 actuarial valuation, these results provide further evidence that ongoing funding levels for LGPS funds and their participating employers are expected to be higher than at 31 March 2022, meaning that ongoing surpluses will have increased further (ongoing funding levels allow for expected future returns of growth assets).

If the current market conditions prevail, the current level of LGPS contributions is expected to continue to drive over-funding. This gives rise to the flexibility to pursue a new, lower stable contribution rate.

The LGPS regulations say that stable contributions are desirable. However, the term “stable” is not defined, nor is “desirable”. While stable could imply no or little change from existing rates, Isio suggests an alternative view would be to look forward to see what rates provide long-term sustainability with a measure of prudence.

Steve Simkins, Partner and public services leader at Isio, says: “With less than six months to go until the 2025 actuarial valuation, and over two years of very good market conditions, the valuation outcome is looking more and more positive. This is good news for the UK economy as many local government, housing and educational organisations will have extra funding to support regional growth.

“Average LGPS employer contribution rates have been over 20% for ten years, but the step-change in market conditions since the 2022 actuarial valuation indicates that a new, lower stable contribution rate can be found. An average LGPS employer contribution rate of 15% of salaries will provide over £2bn of extra funding each year for local government employers.

Steve continues: “The low-risk measure of the average employer cost of future LGPS benefits is currently around 17% of salaries. At the same time, the aggregate low-risk surplus of £44bn as at 30 September 2024 can support a lower contribution rate of 15% for over 50 years. The surplus can also provide a significant funding buffer to stabilise future funding variances in the medium-term, noting that the LGPS’s growth assets would be expected to generate even more future surplus over the long-term.

“Whilst 15% might be the right new average contribution rate for the LGPS, the LGPS is not “one size fits all” as there are a wide range of funding positions across the funds.  For the first time we have funds which are over 100% funded on a low-risk basis and so we expect to see a divergence of risk-return positions. This means that the range of employer contributions is likely to broaden as the average rate falls.”