Local Government Pension Scheme (LGPS) funds have been encouraged to have an open conversation with employers in their fund about contribution rates amid improved funding levels.

Speakers at the Pensions and Lifetime Savings Association (PLSA) Local Authority Conference noted that, due to the surpluses in many LGPS funds, employers could ask for reduced contribution rates.

“We cannot set our contribution rates based on short-term market movements,” South Yorkshire Pensions Authority director and PLSA Local Authority Committee member, George Graham, stated.

“Our dialogue will employers is compromised by the fact that, as pension funds, we are coming at this from a long-term perspective, while employers, for understandable reasons, are coming at this from a short-term perspective.

“We need to think about educating our employers; not just about how contribution rates are set, but about this long-term focus. If I cut contribution rates and then I need to put them back up again, that’s a hell of a problem for the finance director. If I’m going to cut them, I need to give them a sustainable cut.”

Graham noted that while there is a general funding surplus that needs to be paid back to employers, some LGPS funds seemed to have “lost” their understanding of what their duty is: To provide stable and affordable contributions.

“We’ve concentrated on the last and forgotten about the first,” he argued. “For many of us, the surplus position we are in provides the opportunity for us to reach that stable long-term primary rate, which will give more benefits to employers.”

LGPS funds were encouraged to engage with employers about what the options are, to be more open and transparent, and to maintain an ongoing dialogue.

“We are in a new era,” Graham said. “I think it’s a new era of openness and transparency, about opening up our thought processes to employers and having to have those debates with them.

“If we don’t have it openly, our relationships with employers will deteriorate, we will get conflict. The last thing we want is conflict with our employers.

“A strong relationship with employers will make this scheme work well. The commitment of our employers to the scheme is fundamental to our success.”

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