The aggregate funding level for the 87 funds in the Local Government Pension Scheme (LGPS) in England and Wales rose to 106 per cent in Q1 2024, after asset values hit a record high at nearly £400bn, Isio’s latest Low-Risk Funding Index has revealed.

The index showed that, of the 87 participating funds, 55 have funding levels of 100 per cent or higher, with levels ranging from 68 per cent to 159 per cent funded.

This is in contrast with the previous actuarial valuation date, 31 March 2022, when the aggregate low-risk funding position 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 attributed the funding improvement primarily to the rise in asset values, particularly growth assets given the surge in equity markets across the globe

With 12 months to go until the 31 March 2025 actuarial valuation, Isio highlighted the latest results as further evidence that ongoing funding levels for LGPS funds and their employers are expected to be higher than at 31 March 2022, meaning that surpluses will have increased further.

This is not the first time Isio has raised concerns around this, previously called for an "urgent" review of the LGPS employer contribution rate in light of the funding improvements, particularly given that many employers participating in the LGPS in Scotland continue to be offered contribution rate reductions as part of the 31 March 2023 valuations.

The firm also pointed that there is a risk that equity markets fall over the next 12 months, negatively impacting funding, and causing some individual funds and their employers to move below a 100 per cent funding level on a low-risk funding basis, creating an "immediate challenge" across the LGPS.

Isio partner and public services leader, Steve Simkins, explained: “Whilst the LGPS takes a very long-term perspective on funding, the evidence suggests that ongoing funding positions and surpluses have further improved since the 31 March 2022 valuation.

“This creates a tension between LGPS funds’ long-term funding strategies and short-term planning for the next valuation to secure the best outcomes for their employers, some of whom would welcome cost and investment risk reductions.

"Locking in some of the gains made from the current equity market highs presents an opportunity to achieve both.

“At 31 March 2022, with very few exceptions, LGPS funds and their employers were reliant on future equity returns. This position has changed with over half of LGPS funds and their employers moving into a self-sufficient position, shown by our Low-Risk Funding Index.

"So the traditional 'one-size-fits-all employers' investment strategies are becoming less appropriate. It also means that we might see a greater range of investment strategies emerging across LGPS funds.”

Isio's analysis of strategic asset allocations also found that whilst funds are starting to take small steps to ‘lock-in’ improved funding positions and reduce the risks associated with growth assets, closer inspection revealed that, despite the shift on an aggregated basis, a number of funds actually increased their risk over the year to 31 March 2023.

Indeed, Isio associate director and head of public sector investment advisory, Andrew Singh, said that the current market conditions provide a “somewhat unexpected opportunity” for LGPS funds to review the risk levels associated with their investment strategies.

“However,” he clarified, “reducing investment risk does not necessarily have to mean transitioning all the way from ‘growth’ equities to ‘protection’ bonds. It can instead involve modest reductions to expected returns in exchange for more contractual investment return profiles.”

Singh also suggested that, given the market movements seen, it might be necessary for funds to re-balance assets back towards the strategic allocation, or go further and review the strategic allocation.

“Whilst investment strategies are built for the long-time, there are times when short-term considerations come into play and with the next actuarial valuation looming this might be one of those times,” he added.

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