LGPS funding hits new high with £45bn surplus – Improvements mean more flexibility to support the UK growth agenda

• Isio’s Low-Risk Funding Index reveals an increase from 110% to 112% over the period 31 May 2024 to 30 June 2024 – a new record high surplus of £45bn, on a low-risk basis.
• The latest funding high come as asset values continue to improve and inflation levels fall.
• With the new government focussed on how pension assets can support UK economic growth this surplus presents a possible opportunity for LGPS assets to be used directly rather than indirectly through their investment in the UK.
• Following this release, Isio’s Low-Risk Funding Index will take a “summer break” and resume in October based on 30 September market conditions.

30 July 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 improved from 110% at 31 May 2024 to 112% at 30 June 2024.  

The improvement is primarily due to increases in asset values (mainly equities), as well as small reductions to future inflation expectations. Of the 87 participating funds, 69 have funding levels of 100% or higher, with levels ranging from 71% to 169% 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 eight 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 surpluses will have increased further.

Equity markets continue to perform well and gilt yields remain at unexpectedly high levels, demonstrating the need for funds to be flexible in their approaches to setting funding and investment strategies. Surplus funds can be used to offer contribution reductions and de-risked investment strategies can be used to ‘lock-in’ to current market conditions.

As the new UK Government sets to action, public and private sector pension funds have been subject to heightened attention as plans to boost UK investment are put in place. For the LGPS, of interest is the potential consolidation of the 87 individual funds to generate efficiencies and further pooling of assets to enable investment in a wider range of UK assets. Isio believes there are other options available and LGPS assets could be deployed  more directly to support the UK economy.

Steve Simkins, Partner and public services leader at Isio, says: “The LGPS is a hot topic at the moment, as the UK Government sets out its plans to boost UK investment. With LGPS assets across England and Wales currently estimated to be in excess of £400bn, the attractiveness of the LGPS to the new Chancellor is obvious.

“So far we have heard of plans to increase pooling to enable further investment in a wider range of UK assets, whilst at the same time reducing the £2bn of investment expenses. But there is a natural tension here – how can investment expenses be reduced whilst there is an expectation to invest in more complicated and risky assets?

“Instead of focussing on the assets in isolation, more attention could be given to the surplus within the LGPS and how this can be used more directly to influence the UK economy.

“For local authorities, surplus could be used to reduce current contributions and support essential services provided to local communities. A very small reduction in assets will make a very big short-term difference for local authorities. This could create the best long-term returns for the local government.

“For other employers, such as housing associations and universities, surplus could be to enable further investment in housing and skills, key aspects of the new government policy agenda.

“The LGPS is currently so unexpectedly well-funded that there are wider opportunities to utilise the assets whilst maintaining benefits security and long-term contribution stability. Give the size of the assets involved we would encourage a broad and joined-up debate.”