The aggregate funding level for the Local Government Pension Scheme (LGPS) in England and Wales increased from 110 per cent to 112 per cent as at 30 June 2024, with a "record" high surplus of £45bn on a low-risk basis, data from Isio has revealed.

The firm's latest Low-Risk Funding Index update revealed that, of the 87 participating funds, 69 had funding levels of 100 per cent or higher, with levels ranging from 71 per cent to 169 per cent funded.

This stands in contrast with the funding at the previous actuarial valuation date, 31 March 2022, when the aggregate low-risk funding position was 67 per cent, and none of the 87 funds had a funding level of 100 per cent or higher on a low-risk basis.

Isio credited the improvement primarily to increases in asset values, mainly equities, and small reductions to future inflation expectations.

With eight months until the 31 March 2025 actuarial valuation, Isio highlighted the latest figures as further evidence that ongoing funding levels for LGPS funds and their participating employers were expected to be higher than on 31 March 2022, meaning that surpluses will have increased.

Isio also pointed out that equity markets have continued to perform well, and gilt yields have remained at “unexpectedly” high levels, demonstrating the need for funds to be flexible in their approaches to setting funding and investment strategies.

The firm also noted that surplus funds could be used to offer contribution reductions and de-risked investment strategies could be used to ‘lock in’ to current market conditions.

Isio also suggested that, as the new UK government sets to action, public and private sector pension funds have been subject to heightened attention as plans to boost UK investment are put in place.

In particular, the firm said that, for the LGPS, the focus is on the potential consolidation of the 87 individual funds to generate efficiencies and further pooling of assets, enabling investment in a wider range of UK assets.

However, Isio said that other options are available, arguing that LGPS assets could be deployed more directly to support the UK economy.

Isio partner and public services leader, Steve Simkins, said: “The LGPS is a hot topic at the moment, as the UK government sets out its plans to boost UK investment.

“With LGPS assets across England and Wales currently estimated to be in excess of £400bn, the attractiveness of the LGPS to the new Chancellor is obvious.

“So far we have heard of plans to increase pooling to enable further investment in a wider range of UK assets, whilst at the same time reducing the £2bn of investment expenses.

“But there is a natural tension here - how can investment expenses be reduced whilst there is an expectation to invest in more complicated and risky assets?”

Simkins said that instead of focussing on the assets in isolation, “more attention” could be given to the surplus within the LGPS and how this can be used more directly to influence the UK economy.

He explained: “For local authorities, surplus could be used to reduce current contributions and support essential services provided to local communities.

“A very small reduction in assets will make a very big short-term difference for local authorities. This could create the best long-term returns for the local government.

“For other employers, such as housing associations and universities, surplus could be to enable further investment in housing and skills, key aspects of the new government policy agenda.”

Simkins emphasised that currently, the LGPS are so “unexpectedly” well-funded there are wider opportunities to utilise the assets while maintaining benefits security and long-term contribution stability.

He added that given the size of the assets involved, Isio “would encourage a broad and joined-up debate”.

This article was first published on our sister website, Pensions Age.

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