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 was 101% as at 31 December 2023. That represents a drop compared to 108% as at 31 October 2023, when the Index was last published.
The fall is due to reductions to UK government bond yields and higher inflation, which increase the value of low-risk liabilities, partially offset by increases to asset values. The Low-Risk Funding Index has also been updated to reflect the anticipated CPI linked 6.7% increase to be applied to LGPS benefits from 1 April 2024.
Of the 87 participating funds, 44 have funding levels of 100% or higher, with levels ranging from 67% to 148% 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.
Since 31 December 2023, initial analysis suggests funding levels have improved from 101%, indicating that the year-end was a short-term funding low point. This presents further evidence that the fully funded positions are here to stay and should prompt a review of funding and investment strategies.
Steve Simkins, partner and public services leader at Isio, says: “Despite recent uncertainty in global bond markets, our Index shows that the significantly improved funding levels for LGPS funds and their participating employers remain relatively stable at these new, much higher levels compared to 31 March 2022.
“Employers participating in the LGPS continue to struggle to meet ongoing costs and their pensions contributions, which now look excessive, often represent a large proportion of their cost base. It was therefore positive to see the Scheme Advisory Board’s recent note on LGPS surpluses, including inter-valuation contribution rate reviews and de-risking matters, addressing what was already a healthy LGPS funding position at 31 March 2022.
“However, we are concerned that there is not sufficient recognition of the significant improvements for all LGPS funds since then. This is particularly relevant for Local Authorities who face serious financial pressures and for whom a reduction in pension contributions could make a significant difference.
“We 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.”
The Index continues to reveal the individual funding level for each of the 87 participating funds, allowing them to compare their relative position on a low-risk funding basis. The analysis also sets out the comparative position as at the previous actuarial valuation date of 31 March 2022, demonstrating the significant fund-specific improvements.
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