The government has confirmed that the next valuation for all Local Government Pension Scheme (LGPS) funds, which will set the local employer contribution rates for the 2026-27 financial year, will take place next month (March 2025).

Employer contribution rates for the LGPS were last set based on the position as at 31 March 2022, and councils across England and Wales are currently paying a total of more than £6bn per annum into the LGPS for new benefits being built up.

Asked whether the government had a planned timetable for the next valuation and a review of employer and employee contribution rates, Local Government and English Devolution minister, Jim McMahon, confirmed that this is expected in the upcoming months.

"As required by Regulation 62 (1) of the LGPS Regulations 2013, a formal valuation of all Local Government Pension Scheme (LGPS) funds is carried out every three years," he stated.

"The next valuation will take place as at 31 March 2025. This will set local employer contribution rates which will come into effect for the 2026-27 financial year. Employee contribution rates are set centrally and reviewed on a regular basis."

And this could bring significant changes in contribution levels, as recent analysis from LCP suggested that the actual contribution rate required to provide for new benefits being built up, based on the position today, could be half the rate at 31 March 2022.

This means that councils could reduce their contributions, freeing up more money to spend on local services.

"As we approach the 2025 valuation we expect some big changes in contributions if financial markets remain similar up to the end of March," LCP partner, Tim Gilbert, stated.

"Given the huge swings in funding positions we have seen recently, we think LGPS Funds should build contribution flexibility mechanisms into the results to give greater scope for reflecting future changes.

“Given the structure of the LGPS, funds that have delivered strong investment returns should consider what they are looking to achieve. They may wish to build up a reserve to protect against future risks, or to reduce the cash cost of providing benefits.

Industry experts have previously urged the government to review LGPS employer rates in England and Wales following significant improvements in LGPS funding levels.

Indeed, recent analysis from Isio showed that the aggregate funding level of the 87 participating funds in the LGPS in England and Wales reached a record high of 125 per cent at the end of 2024.

Given this, Isio suggested that the government’s focus should be on funding and investment strategies, to reset employer contributions and risk management, rather than solely on the pooling of local investment opportunities and governance of the LGPS as outlined in its current consultation.

Isio stated that the latest findings showed that funding levels were likely to be much higher at the next valuation date, with the cost of future service benefits also having fallen “significantly”.

It argued that the most effective way to find funding for local and regional government would be through reduced employer contributions, which it believed was possible in light of the strong funding levels.

This would be more cost efficient and quick than the alternative of LGPS pools investing in local opportunities, and would allow more agile use of resources and could free up around £25bn of funding, Isio said.

This is not the first time Isio has raised concerns around this, having previously called for an "urgent" review of the LGPS employer contribution rate in light of the funding improvements, particularly given that many employers participating in the LGPS in Scotland were offered contribution rate reductions as part of the 31 March 2023 valuations.

Some councils have already made changes to their pension funding, as the Royal Borough of Kensington and Chelsea Pension Fund’s investment committee recently voted for council pension contributions to be cut to zero for the next financial year.

Given this, LCP partner, Tim Blog, suggested that updated guidance is needed on how councils should make such requests, and how funds should consider them given other councils may soon follow suit.

“Kensington and Chelsea won’t be the only LGPS fund in this situation, given the current strong funding levels in the LGPS and the pressures on finances across the public sector," he cautioned.

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