The government must review rules and guidance around how funds within the Local Government Pension Scheme (LGPS) set contribution rates, according to LCP.
Last week, the investment committee for the Royal Borough of Kensington and Chelsea Pension Fund voted to allow the council to pay nothing into the fund for the 2025-26 financial year – against the advice of its actuary, Hymans Robertson.
The pension fund is more than 200% funded, meaning the zero contribution rate is expected to have minimal impact on the financial position of the scheme and it will not affect benefit payments.
However, the fund’s actuary and the internal pensions team have warned that the decision could have serious repercussions, including interventions from the Pensions Regulator or the Ministry of Housing, Communities and Local Government.
More guidance needed
Writing on LCP’s website this week, Tim Gilbert, partner at the consultancy, said the episode showed that more guidance was needed to help councils make such requests.
“The current situation leaves fund actuaries and committee members in a very difficult position,” he said. “For example, the report for the Kensington and Chelsea fund notes that setting a nil rate ‘would have only a marginal impact on future outcomes and should not have a detrimental effect on the ability of the Fund to pay pension benefits’, while also noting the actuary’s conclusion that in the circumstances the current guidance may not permit such a reduction.”
While LGPS funds and private sector defined benefit (DB) pension schemes are often not directly comparable, Gilbert pointed out that a corporate DB scheme in a similar funding position would be “very likely” to succeed in securing a contribution holiday.
He added: “We have recently worked with clients who participate in the LGPS as admitted bodies, who have agreed that surplus assets in their section can be used to pay future contributions.
“Such agreements are made on an individual employer basis, and the approach to agreeing and implementing varies widely across the different funds, but shows that councils and other employers could benefit further from unlocking surplus assets.”
The LGPS in England and Wales has an estimated surplus of more than £100bn. Across the system, councils are paying more than £6bn a year into LGPS funds at a time when many are struggling to meet budgetary requirements.
Current contribution rates are based on the 31 March 2022 valuation, with the next due to be conducted this year. LCP estimated that contribution rates could be halved based on funding improvements since 2022.
“Given the structure of the LGPS, funds that have delivered strong investment returns should consider what they are looking to achieve,” Gilbert said. “They may wish to build up a reserve to protect against future risks, or to reduce the cash cost of providing benefits.
“Kensington and Chelsea won’t be the only LGPS fund in this situation, given the current strong funding levels in the LGPS and the pressures on finances across the public sector.”
According to LAPF Data Services, a service from DG Publishing, 61 of the 86 LGPS funds in England and Wales were at least 100% funded as of 31 March 2022.
