LGPS funds can expect an increase in their funding levels of around 7-12 per cent at the 2022 valuation, analysis from Hymans Robertson has revealed.

Hymans Robertson attributed the improvement to two primary factors: Actual events since the last valuation being different from what was expected and a change in the outlook for the future.

Regarding actual events, the analysis noted that the biggest funding event since 2019 was strong investment returns, explaining that the average investment return from the sample had been around 28 per cent (8.5 per cent per annum), with one fund returning in excess of 30 per cent.

Hymans Robertson stated that these “excellent” levels of returns had improved the funding level by around 15 per cent.

The consultancy highlighted events since the 2019 valuation that had a smaller impact on the funding level, including salary increases (which caused a 0.7 per cent reduction), benefit increases (1.2 per cent improvement), and the impact of Covid-related deaths (an impact of less than 0.1 per cent).

The biggest change in outlook was identified as inflation, with an average increase of around 0.4 per cent a year across the duration of the liabilities to reflect the high-inflation environment, with this increase alone reducing the funding level by “around 7-8 per cent”.

The consultancy stated that its analysis was good news for employers but warned that funds should be cautious about getting too excited at this stage, as the analysis is at whole fund level and its results will vary between employers depending on their own experiences.

Hymans Robertson head of LGPS valuations, Robert Bilton, commented: “The 2022 LGPS valuations take place against a background of rising inflation, post Covid and a cost-of-living crisis – a starkly different environment from the previous valuation. However, the big finding to date is a continuation of the recent improvement in past service funding levels, and our early research indicates this to be between 7-12 per cent.

“Our analysis indicates that strong three-year investment returns of 27-28 per cent have been the driver behind the improvement, more than offsetting higher future inflation expectations.

“Other factors such as salary increase and life expectancy post-Covid have had minimal impact on the funding position.

“For funds, we would urge cautious optimism as experience tells us that the funding position does not directly drive employer contribution rates – these will start to be reported in the next few weeks.”

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