The Local Government Pension Scheme (LGPS) in England and Wales is fully funded on a low-risk basis, analysis from Isio has found, recording an aggregate funding position of 102 per cent.

The new LGPS Low-Risk Funding Index showed that the LGPS funding level has improved dramatically since the most recent triennial valuations were carried out as at 31 March 2022, when funding was estimated to be 67 per cent on the same low risk basis and none of the 87 funds had a funding level of 100 per cent or higher.

According to the update, every LGPS fund’s funding level increased by at least 30 per cent on a low-risk basis over the period 31 March 2022 to 31 July 2023, with the exception of the Environment Agency (Closed) Pension Fund.

Isio attributed this improved funding level primarily to the significant increase in UK government bond yields, which resulted in the value of liabilities assessed with reference to bond yields falling dramatically.

However, the firm clarified that there are still significant differences in funding position between fund, pointing out that while 46 funds are fully or over-funded, 41 of the funds in the LGPS are under-funded, with funding levels ranging from 150 per cent on the over-funded side to just 66 per cent at the under-funded end of the spectrum.

Despite this, Isio highlighted the prevailing market conditions as an "immediate opportunity to enhance long-term sustainability for funds and their employer", suggesting that those employers that are over-funded are most likely to seek change.

Commenting on the inaugural index, Isio partner and public services leader, Steve Simkins, said: "LGPS funds are in a significantly better position to March last year and it is important that those close to or exceeding full funding consider what they do now to capitalise, both to lock in their position and to avoid overpaying contributions.

“While de-risking is almost always the right answer for fully funded trust-based schemes, it must be carefully considered by individual LGPS funds given their open status and long-term nature. However, de-risking does not need to be wholesale and it does not need to be permanent.

“Each fund is made up of many participating employers, each with different funding positions and objectives, and so each Fund should actively engage with its employers on their own merits, enabling de-risking or reductions in future contribution rate levels where appropriate. There is a risk of inaction, if market conditions were to worsen again.

“At the same time, with such a paradigm shift for the LGPS’s finances, we expect the Department for Levelling Up, Housing and Communities and the LGPS Scheme Advisory Board to urgently engage with these changes and consider whether an out of cycle actuarial valuation should be triggered to avoid further over-funding.

"This could have a significant and positive financial benefit for councils, many of whom are struggling to deliver core services. Excessive pension contributions constitute unnecessary spend and should be challenged.”

Isio is expected to share further updates from the index on a monthly basis, tracking levels and the impact of further changes in market conditions.

Going forwards, the Index will be extended to reveal funding levels for each individual LGPS fund and monitor how funds are responding to current market conditions through their investment strategies and employer engagement.

Isio said it also hopes to collaborate with funds to strengthen the index’s database and access to recent changes and actions being taken.

A similar index for Scotland will also be released over the coming months.

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