The aggregate funding level of Local Government Pension Scheme (LGPS) funds in England and Wales on a ‘low-risk’ basis fell by 7 percentage points to 101 per cent in the fourth quarter of 2023, Isio’s latest Low-Risk Funding Index has revealed.

The decline was attributed to reductions in UK government bond yields and higher inflation, which increased the value of low-risk liabilities.

However, this was partially offset by increases to LGPS funds’ asset values.

Isio’s index had also been updated to reflect the anticipated CPI-linked 6.7 per cent increase to be applied to LGPS benefits from 1 April 2024.

Of the 87 LGPS funds in England and Wales, 44 had funding levels of 100 per cent or higher, with levels ranging from 67 per cent to 148 per cent funded.

Isio stated that the update showed that funding levels for LGPS funds and their employers consistently remained much higher than 31 March 2022 levels, which were used to set funding and investment strategies that may no longer be appropriate in the current conditions.

At the end of March 2022, the aggregate funding level was 67 per cent and none of the 87 funds had funding levels of 100 per cent or higher.

According to Isio, its initial analysis suggested that funding levels have improved from 101 per cent since the end of December, which indicated that the year-end was a “short-term funding low point”.

The consultancy said this presented further evidence that the fully funded positions were here to stay, and should prompt funds to review their funding and investment strategies.

“Despite recent uncertainty in global bond markets, our index shows that the significantly improved funding levels for LGPS funds and their participating employers remain relatively stable at these new, much higher levels compared to 31 March 2022,” commented Isio partner and public services leader, Steve Simkins.

“Employers participating in the LGPS continue to struggle to meet ongoing costs and their pensions contributions, which now look excessive, often represent a large proportion of their cost base. It was therefore positive to see the Scheme Advisory Board’s recent note on LGPS surpluses, including inter-valuation contribution rate reviews and de-risking matters, addressing what was already a healthy LGPS funding position at 31 March 2022.

“However, we are concerned that there is not sufficient recognition of the significant improvements for all LGPS funds since then. This is particularly relevant for local authorities who face serious financial pressures and for whom a reduction in pension contributions could make a significant difference.

“We 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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