Differing funding levels within the Local Government Pension Scheme (LGPS) are provoking investment-related “structural issues,” according to the latest index published by Isio.

While funding levels are up, pressure to create efficiencies by merging funds risks creating a uniform approach to investment that may not suit all participating funds, Isio said.

Isio’s most recent Low-Risk Funding Index revealed an improvement of aggregate funding for those funds participating in the LGPS in England and Wales. Levels reached 110 per cent in May 2024, up from 109 per cent the previous month.

Of the 87 participating funds, 59 have funding levels of 100 per cent or higher; levels spanned 69 per cent to 164 per cent funded.

At the last actuarial valuation date, 31 March 2022, the aggregate low-risk funding position was 67 per cent, and none of the 87 participating funds had a funding level of 100 per cent on a higher or low-risk basis.

The improvement in funding was largely down to an increase in the value of assets – primarily equities – although this was partially offset by a fall in UK gilts yields, Isio said.

And, according to Isio, in May 2024, the difference between returns on equities and gilts reached the widest point since 31 March 2022.

This fact could lead LGPS funds to question whether equities are the best choice, or if gilts could be better placed to help lock in funding levels – a question with no one-solution-fits-all answer.

The LGPS brings together many employers, each with its own funding position, and requirements will vary widely; employers who are over 100 per cent funded on a low-risk basis are likely to have different views on equities than those needing to build funding through investment outperformance or more cash contributions, Isio said.

Isio partner and public services leader, Steve Simkins, commented: “No pension schemes planned for the huge increases in UK government gilt yields in 2022, which led to an immediate liquidity crisis for private sector schemes.

"And now the LGPS is facing its own challenge which has played out more slowly and is coming to a head.”

He added: “The current equity and gilt market divergence will cause LGPS funds to consider whether they stick with equities or switch to gilts. This is a significant risk decision on behalf of their employers, who are not all the same.”

While most councils might want to play “the long game,” Simkins said, some employers who have been asked to pay more contributions could be keen to lock in surpluses with a change of investment direction.

“This highlights the ‘postcode lottery’ for employers whose investment strategy depends on the fund they are in, only some of which offer a lock-in option,” said Simkins.

With employers within funds with divergent requirements, Simpkins added: “Now would be an ideal time for all LGPS funds to be able to introduce employer-specific investment strategies.”

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