Funding positions for LGPS funds and their participating employers remain strong, providing opportunities to review funding and investment strategies currently in place
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 101% at 31 December 2023 to 104% at 31 January 2024, representing an improvement of almost £13bn.
The improvement is due to increases to UK government bond yields, which reduces the value of liabilities, and small increases to asset values. The improvement is partially offset by a slight increase in inflation.
Of the 87 participating funds, 54 have funding levels of 100% or higher, with levels ranging from 66% to 154% funded.
The results show that funding levels for LGPS funds and their employers remain consistently much higher than 31 March 2022 levels, which were used to set funding and investment strategies that may no longer be appropriate under current conditions. Back then, funding was 67% and none of the 87 funds had a funding level of 100% or higher on a low-risk basis.
Isio also conducted an analysis of strategic asset allocations within funds’ published 2023 annual accounts, where available, and estimates that around £10bn of LGPS assets were transitioned from growth to non-growth assets over the year to March 2023. This suggests that funds are starting to take small steps to lock in improved funding positions and reduce the risks associated with growth assets. However, closer inspection shows that some funds have actually increased their risk over this period.
Steve Simkins, partner and public services leader at Isio, says: “Our Index shows that funding levels for LGPS funds and their participating employers remain consistently strong, particularly as we approach the two year mark since the last actuarial valuations were carried out.
“It is positive to see that the LGPS as a whole has started to respond to these improved funding positions, by reducing the total amount of assets invested in higher risk growth assets. However, the estimated £10bn shift in assets is only a small proportion of the whole. We expect to see this pattern continue from March 2023, and potentially accelerate, while market conditions remain extremely favourable.
“While the modest de-risking at fund level is welcome, it is not sufficient for some employers in surplus who might want to move all of their assets into bonds. We would like to see more funds provide their participating employers with the opportunity to better manage their own assets, through the implementation of employer-specific investment strategies or other alternatives.
We continue to encourage employers, particularly Local Authorities, to engage with their respective LGPS fund to consider their challenges and individual circumstances to make a case for short-term reductions to contributions, enabling delivery of essential public services to local communities and retention of local jobs.”
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