LGPS (E&W) Low-Risk Funding Index: 31 October 2023 results

Introduction

This update sets out the latest low-risk funding position for the LGPS (E&W). 

The estimates have been carried out as at 31 October 2023 and assume a ‘low-risk’ funding basis for the liabilities, i.e. the basis that would apply if assets were fully invested in liquid, low-risk investments, such as government bonds. 

The aggregate funding position has been calculated by combining the individual results for each of the 87 pension funds participating within the LGPS (E&W). A summary of the individual results is set out within this update, which, for the first time, have been provided on a named basis. 

Please note that the numerical information set out within the update has been calculated using approximate methods, based on information available within the public domain (not necessarily the most recent), and has been provided for information purposes only. It should not be considered as advice or be relied upon in making any financial decisions. Further information is detailed in the Appendix linked below. 

Background and purpose

Market conditions for pension schemes have improved significantly since the most recent LGPS (E&W) actuarial valuations were carried out as at 31 March 2022. The value of liabilities assessed with reference to gilt yields has fallen dramatically. This has led to material improvements in funding levels for funds and their employers, and indicates that funds should: 

• Consider their funding and investment objectives in light of significantly improved funding levels (these may differ when levels are approaching or exceeding 100%)
• Actively review investment strategies, specifically considering whether de-risking opportunities should be taken advantage of 
• Consider whether certified employer contributions should be reduced before 1 April 2026 to avoid overfunding
• Recognise the differing needs of their employer base and enable their participating employers to agree funding and investment arrangements that reduce current contribution rates and/or ongoing risk exposure 

The purpose of providing this update is to:

• Highlight the very significant funding improvements experienced since 31 March 2022
• Provide a monthly update to track the evolving funding position and the impact of changes in market conditions since the launch of the Index and later reference points
• Monitor funds’ responses to these improved funding positions, considering investment strategy and employer engagement 

Current market conditions are very good news for the LGPS and present an immediate opportunity to enhance long-term sustainability for funds and their employers. 

Changes since previous release as at 30 September 2023

• Since 30 September 2023, the estimated aggregate funding level for the LGPS (E&W) has increased from 107% to 108% 
• The improvement in funding level is largely due to improvements in UK Government bond yields, partially offset by small reductions to asset values 
• The number of funds with funding levels greater than 100% remains at 55 
• A comparison of the estimated aggregate asset and liability values at 30 September and 31 October 2023 is set out in this chart below 

Individual results

The table below details the change in funding level from 31 March 2022 to 31 October 2023 for all funds who participate within the LGPS (E&W). The chart also sets out the average funding levels at each of the two dates. The results have been provided on a named basis at the end of this update.

Summary of individual fund results

The table below sets out the highest and lowest funded of the 87 funds, as well as those with the average funding level of 108%, as at 31 October 2023:

Main observations

• Trust-based pension schemes fully funded on a low-risk basis are, with very few exceptions, transitioning to lower risk investment strategies as quickly as possible
• De-risking does not have to be permanent and it does not need to apply to future service
• We expect DLUHC and the LGPS SAB (as part of their Surpluses Working Group) to monitor these changes and consider whether more widespread action is required (e.g. an out of cycle actuarial valuation to prevent overfunding)
• We hope that funds will consider the 4 points listed at the top of this article and take effective action to accurately reflect the prolonged significant improvement in funding levels

Next steps

Overall, based on the sustained improvement in funding levels, we would expect to see funds consider:

• Shifting to lower risk investment strategies, for example through increased exposure to gilts and bonds;
• Reviewing current employer contribution rates, in particular, whether it might be appropriate to reduce current rates; and
• Offering de-risking opportunities and other flexibilities to employers

Engagement with funds

This update has been prepared using information available within the public domain (not necessarily the most recent) and our calculations are estimate in nature (see the Appendix for further information).

Since the launch we have not incorporated any new publicly available information or been provided with any new information by funds. In future releases we will do so and provide some commentary on the impact of this new information.

If you are a participating LGPS (E&W) fund and would like to speak to an Isio representative to discuss the information set out within this update or to provide more accurate and up-to-date information, please contact: steve.simkins@isio.com

Reliances and limitations

The numerical information set out within the update 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.

Contact details

If you would like to speak to an Isio representative to discuss the information set out within this update, please contact: steve.simkins@isio.com.