The aggregate funding level of the 87 funds in the Local Government Pension Scheme (LGPS) in England and Wales increased from 101 per cent to 104 per cent in January, Isio’s Low-Risk Funding Index has revealed.

This represents an improvement of nearly £13bn during the month.

Isio attributed the improvement to increases in UK government bond yields, which reduced the value of liabilities, alongside a slight rise in asset values.

However, this was partially offset by a small increase in inflation.

Of the 87 participating funds, 54 had funding levels of 100 per cent or higher, with funding levels ranging from 66 per cent to 154 per cent.

Isio noted that the funding levels for LGPS funds and their employers remained “consistently much higher” than levels at 31 March 2022, which were used to set funding and investment strategies.

The firm said that these strategies therefore may no longer be appropriate under current conditions.

In March 2022, the aggregate funding level was 67 per cent and none of the 87 funds had a funding level of 100 per cent or higher on a low-risk basis.

Isio estimated that around £10bn or LGPS assets were transitioned away from growth to non-growth assets over the year to March 2023, which suggested that funds were starting to lock in improved funding positions and reduce the risks associated with growth assets.

However, it said that, under closer inspection, some funds had actually increased their risk over the same period.

“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,” said Isio partner and public services leader, Steve Simkins.

“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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