The Local Government Pension Scheme Scheme Advisory Board has noted the possibility of employer contribution rates rising, despite the expectation that many local authority schemes will have improved their funding positions — or even moved into surplus — as of March 31 2022.
Employer LGPS contributions in England and Wales fell by almost a quarter in the 2021-22 period, dropping to £7.8bn from £10.3bn.
According to the Department for Levelling Up, Housing and Communities, this decline is normal after every third year, since many employers make early payments for three years at a time. The value for last year was higher than usual, the department added.
On November 1, the SAB nevertheless noted that local government finances are tight, and stressed the importance of cost savings.
We would expect discount rates to be set at a prudent level
Scheme Advisory Board
It suggested that discount rates be set at a “prudent level” — despite the strong funding levels displayed as of March — given current pressures on the economy and “wider funding”.
Markets have taken a turn since March
According to a Barnett Waddingham timeline of the LGPS valuation process, schemes will be calculating and reporting individual employer results throughout October and November.
They will communicate these results from October until February 2023. Valuation reports will be drafted and signed off in January and February next year, with revised contribution schedules starting in April 2023.
In October, DLUHC disclosed that income to LGPS schemes in England and Wales in 2021-22 was £15.9bn — a decrease of £1.4bn, or 8.1 per cent. Expenditure, meanwhile, increased by £900mn to £14.4bn.
Employees’ contributions to the scheme rose by 4.8 per cent to £2.6bn, while investment income jumped 21.2 per cent to £4.5bn.
The SAB acknowledged that “a good proportion of funds are likely to move into surplus or improve their surplus position” as a result of the three-year market performance leading to March 31 2022.
“It is understandable that this would naturally lead to discussions between fund employers, particularly the administering authority as a fund employer itself, and the fund’s actuarial advisers about employer contributions and whether being 100 per cent-plus funded could mean reductions are desirable,” it continued, acknowledging the financial pressures faced by local government.
The SAB highlighted the invasion of Ukraine, rising inflation and wider global economic uncertainty, along with changes to interest rates in the G7 countries, all of which have led to heightened financial market turmoil.
Post-pandemic retirement surge increases LGPS expenditure
A rise in the number of people retiring following the pandemic contributed towards a 6.6 per cent increase in Local Government Pension Scheme expenditure, data from the Department for Levelling Up, Housing and Communities has revealed.
“Thus while LGPS funds may show a degree of surplus ‘as at’ March 31 2022, the board agreed that, notwithstanding the current economic and wider funding pressures, we would expect discount rates to be set at a prudent level, and one which recognises this uncertainty,” it said.
“The board acknowledged that this might mean increases in the primary, or future service, rates for employers which may offset, in whole or in part, any reduction in secondary contributions arising from the improved funding position.
“Whilst understanding and recognising the extremely challenging position for local government finance, the board would ask that administering authorities and other fund employers have regard to the desirability for long term stability in pension contributions to smooth any surplus and deficits, and to allow for effective pension fund cash flow planning”.
