The funding strategies of Local Government Pension Scheme (LGPS) funds will “need to move on” amid the changing investment landscape and current surplus environment, industry experts have said.

Speaking at the Pensions and Lifetime Savings Association’s (PLSA) Local Authority Conference, Hymans Robertson partner and head of LGPS consulting, Catherine McFadyen, stated that while the previous funding era was one of high contributions and funding black holes, the landscape had now changed and LGPS funds’ funding strategies would need to move on too.

She noted that while pension scheme funding was in a “new era”, LGPS funds were being relatively cautious in taking time to consider adjustments to their investment strategies amid the surplus environment.

“At the end of May 2024, the yield on government bonds was 4.7 per cent,” McFadyen continued.

“That’s more than funds were expecting in their discount rates back in 2022. Higher future returns means that you need less money today to fund the same amount of pension. This is a lot of what is defining this new funding era.”

Discussing new strategies for the surplus environment, McFadyen said that most funds and their advisers had been cautious so far due to the understanding of funding being for the long term.

“We’ve lived through deficits and with our governance environment it can take time for new ideas to germinate and build consensus,” she said. “There’s a slight sense of a herd mentality.”

Highlighting the ways in which funding surpluses can be used, McFadyen pointed to rebuilding prudence margins; risk mitigation, whether that’s a view on short-term investment markets or longer-term risks such as climate; and cashflow management.

McFadyen also pondered as to whether the LGPS could become self-sufficient, as some of its funds are approaching funding levels of 150 per cent or more.

“Could those surplus assets and the return on those surplus assets provide enough income and capital growth to subsidise employer contribution rates over a really long period of time?” she asked.

“From a taxpayer perspective, the LGPS is a huge success story; it’s a real contrasting fortune with the other unfunded public service schemes.

“We must continue to communicate the benefits of our invested assets, so beyond their contribution to meeting the costs, we have to engage on how investments drive positive impacts in the UK and beyond, and continue to demonstrate how, as investors, we can support climate and carbon transition goals.”

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