The aggregate funding level of the 87 participating funds in the Local Government Pension Scheme (LGPS) in England and Wales reached a record high of 125 per cent at the end of 2024, Isio has revealed.

Isio’s Low-Risk Funding Index showed that LGPS aggregate funding levels rose by 13 percentage points in Q4 2024, up from 112 per cent at the end of September.

In light of the record funding level and upcoming 2025 actuarial valuations, Isio suggested that the government’s focus should be on funding and investment strategies, to reset employer contributions and risk management, rather than solely on the pooling of local investment opportunities and governance of the LGPS as outlined in its current consultation.

Over the third quarter of 2024, UK gilt yields rose, which reduced the value of liabilities, while further improvements were made to asset values, primarily in equities.

LGPS assets exceeded £415bn for the first time, with a low-risk surplus of £85bn at the end of December.

Of the 87 participating funds, 83 had funding levels of 100 per cent or higher, with levels ranging from 73 per cent to 192 per cent funded.

At the previous actuarial valuation date of 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 or greater.

Isio stated that the latest findings showed that funding levels were likely to be much higher at the next valuation date, with the cost of future service benefits also having fallen “significantly”.

It argued that the most effective way to find funding for local and regional government would be through reduced employer contributions, which it believed was possible in light of the strong funding levels.

This would be more cost efficient and quick than the alternative of LGPS pools investing in local opportunities, and would allow more agile use of resources and could free up around £25bn of funding, Isio said.

“Being fully funding on a low-risk funding measure is a line in the sand for any pension scheme, including the LGPS,” commented Isio partner and public services leader, Steve Simkins.

“The LGPS’s aggregate position has been over 100 per cent for nearly two years and the recent increase to 125 per cent is a significant step change. This should prompt serious consideration by all involved.

“This is no longer a market blip, but the new normal. The outlook for the government’s cost of borrowing has been hit recently, but it is these higher borrowing costs that are driving down low-risk pension liabilities. This includes future service costs which are now at unprecedented low levels.

“In the context of the government’s borrowing and funding challenges and the funding shortfalls in local government, there is a clear opportunity to direct resources to local government efficiently and quickly through lower employer contributions. Total employer contributions to the LGPS in England & Wales are over £8bn a year which means that a reduction can make a material different to local and regional economies. Around £25bn could be freed up over three years.

“The short-term focus of getting all assets into the LGPS pools by 1 April 2026 and investing £20bn of this into local and regional economies, is starting to feel misplaced.

“Better outcomes could be achieved by concentrating on the actuarial valuation deadline of 31 March 2025, which will reset employer contributions and investment strategies for the next three years. More pooling can follow and then be structured in way which best fits into a future with lower net cashflows and reduced risk levels.”

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