The aggregate funding level of Local Government Pension Scheme (LGPS) funds in England and Wales remained at 112 per cent in the third quarter of 2024, analysis from Isio has revealed.

Isio’s Low-Risk Funding Index showed that LGPS funds had an aggregate surplus of £44bn at the end of September.

During Q3, further improvements were made to asset values, particularly equities, alongside small reductions to future inflation expectations.

However, these positive changes were offset by falling gilt yields, which led to a slight increase in the value of liabilities.

Of the 87 participating funds, 69 had funding levels of 100 per cent or higher, with levels ranging from 73 per cent to 168 per cent funded.

October has seen further funding improvements, according to Isio, with a new record high funding level of 118 per cent and surplus of £64bn.

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 higher.

Isio said the latest findings provided further evidence that the ongoing levels for LGPS funds and their participating employers were expected to be higher at the next actuarial valuation on 31 March 2025, meaning that ongoing surpluses will have increased further.

Furthermore, if the current market conditions prevailed, Isio stated that the current level of LGPS contributions was expected to continue to drive over-funding, giving rise to the flexibility to pursue a new, lower stable contribution rate.

The firm noted that while LGPS regulations say that stable contributions are desirable, the terms ‘stable’ and ‘desirable’ are not defined.

While ‘stable’ could imply little or no changes from existing rates, Isio suggested an alternative view would be to look forward to see what rates provide long-term sustainability with a measure of prudence.

“With less than six months to go until the 2025 actuarial valuation, and over two years of very good market conditions, the valuation outcome is looking more and more positive,” said Isio partner and public services leader, Steve Simkins.

“This is good news for the UK economy as many local government, housing and educational organisations will have extra funding to support regional growth.

“Average LGPS employer contribution rates have been over 20 per cent for 10 years, but the step-change in market conditions since the 2022 actuarial valuation indicates that a new, lower stable contribution rate can be found.

“An average LGPS employer contribution rate of 15 per cent of salaries will provide over £2bn of extra funding each year for local government employers.

“The low-risk measure of the average employer cost of future LGPS benefits is currently around 17 per cent of salaries. At the same time, the aggregate low-risk surplus of £44bn as at 30 September 2024 can support a lower contribution rate of 15 per cent for over 50 years.

“The surplus can also provide a significant funding buffer to stabilise future funding variances in the medium-term, noting that the LGPS’s growth assets would be expected to generate even more future surplus over the long-term.

“Whilst 15 per cent might be the right new average contribution rate for the LGPS, the LGPS is not ‘one size fits all’ as there are a wide range of funding positions across the funds.

“For the first time we have funds which are over 100 per cent funded on a low-risk basis and so we expect to see a divergence of risk-return positions. This means that the range of employer contributions is likely to broaden as the average rate falls.”

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