LGPS funding hits record highs calling pooling focus into question
Press Releases
- Isio’s Low-Risk Funding Index reveals the LGPS funding level improved significantly in Q4 2024, ending the year at a record-high 125%, with a low-risk surplus of £85bn
- This strong funding position results from the panacea combination of rising UK gilt yields and asset value increases, with assets exceeding £415bn for the first time
- The upcoming 2025 actuarial valuation presents a significant opportunity for local and regional government to review funding and investment strategy
- This could unlock £25bn of funding over three years – arguably much more effective than the current
14 January 2025: 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 increased very significantly from 112% as of 30 September 2024 to a new record high of 125% as of 31 December 2024.
Over the period, UK gilt yields increased in line with US treasury bonds yields, reducing the value of liabilities, while further improvements were made to asset values (mainly equities). LGPS assets exceeded £415bn for the first time, with a low-risk surplus of £85bn.
Of the 87 participating funds, 83 have funding levels of 100% or higher, with levels ranging from 73% to 192% 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 three 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 likely to be much higher than on 31 March 2022. The cost of future service benefits has fallen significantly too.
The LGPS has received much attention of late, with the government’s current “Fit For The Future” consultation focusing solely on the pooling of local investment opportunities and governance of the LGPS. However, given the significant improvements in market conditions and the upcoming 2025 actuarial valuations, the focus for the LGPS should arguably be on funding and investment strategies, to re-set employer contributions and risk management.
The most effective way to find funding for local and regional government would be through reduced employer pension contributions, which are now possible for well-funded LGPS Funds even if they choose to lock in their improved positions by switching to low-risk investment strategies. This would be cost efficient and quick versus the alternative of LGPS pools investing in local opportunities. It would allow more agile use of resources and could free up around £25bn of funding, more than 5% of the LGPS’s assets.
Steve Simkins, Partner and public services leader at Isio, says: “Being fully funding on a low-risk funding measure is a line in the sand for any pension scheme, including the LGPS. The LGPS’s aggregate position has been over 100% for nearly two years and the recent increase to 125% is a significant step change. 83 of the 87 individual funds are now over 100% funded on a low-risk basis, whereas none were as of 31 March 2022. This should prompt serious consideration by all involved.
“This is no longer a market blip, but the new normal. The outlook for the government’s cost of borrowing has been hit recently, but it is these higher borrowing costs that are driving down low-risk pension liabilities. This includes future service costs which are now at unprecedented low levels.”
Steve continues: “In the context of the government’s borrowing and funding challenges and the funding shortfalls in local government, there is a clear opportunity to direct resources to local government efficiently and quickly through lower employer contributions. Total employer contributions to the LGPS in England & Wales are over £8bn a year which means that a reduction can make a material different to local and regional economies. Around £25bn could be freed up over three years.
“The short-term focus of getting all assets into the LGPS pools by 1 April 2026 and investing £20bn of this into local and regional economies, is starting to feel misplaced. Better outcomes could be achieved by concentrating on the actuarial valuation deadline of 31 March 2025, which will reset employer contributions and investment strategies for the next three years. More pooling can follow and then be structured in way which best fits into a future with lower net cashflows and reduced risk levels.”