Local Government Pension Scheme 2022 valuation outcome – decoding the numbers

So what does this look like in practice?  Research from Hymans Robertson shows that, on a range of measures, this is leading to a sunnier outlook for LGPS funds and employers:

• fund asset values have risen by between 17 and 43% (27.15% on average);
• despite short-term inflationary pressures leading to increased liabilities and the impact of the McCloud case adding 0.4% to liabilities, funding levels have also risen by 8.5% on average;
• 51 LGPS funds (out of 73 funds which had reported by 18 April 2023) are at least 100% funded (2019: 20 funds) with the average funding level now at 107%;
• in aggregate the LGPS (across all funds) has a 77% likelihood of being sustainably funded over the next 20 years with each LGPS fund having at least a 63% chance of having enough money to pay benefits in the future;
• on average employer contributions have reduced by 1.1%.  Whilst the cost of future benefits has increased by 1.2% due to expectations of higher inflation, the cost of funding deficits on past benefits has reduced by 2.3%;
• LGPS funds have not translated the full improvement in funding levels into reductions in contributions but are holding some back as a buffer to ensure stability in the contributions rates at future valuations;
• the average employee contribution has also grown by 0.1% to 6.5% which probably reflects above-inflation wage increase due to increases in the various rates of the national minimum wage;
• the total average cost of LGPS benefits is about 26% of pay.

There are a couple of important points to note as you digest this:

• these are average results and the position for individual LGPS funds and employers may be quite different, which reflects the different investment strategies of different funds;
• although the sun may be shining on LGPS funds and employers now, it’s no guarantee that rain isn’t on the way or, to put it another way, past performance is no guarantee of future results.  As we look back over what has happened just over the last 3-year valuation cycle, there are many events which have had a profound impact on the macro-economic position which few would have predicted: the Covid-19 pandemic, the war in Ukraine and Liz Truss’ mini-budget spring to mind.  One of the few certainties in life is that we cannot confidently and accurately predict the future.

What then are the takeaways? 

• LGPS funds, employers and members can take comfort from the fact that funds have a good chance of having enough money to pay benefits in the future, with funds wisely putting away some of the gains of the last three years for a rainy day;
• employers wanting to exit the LGPS may well be in as good a position to exit as at any time in the last few years as they sit on much-reduced deficits or even surpluses.  Some are certainly making hay whilst the sun shines and taking steps to exit before the economic weather changes;
• members are getting good value from their membership which is delivering guaranteed benefits at an overall average cost of about 26% of pay with an average cost to members of about 6.5% of pay;
• with many employers finding pay negotiations increasingly difficult in a high-inflation climate, they would do well to remind employees and trade unions that the average employer contribution to the LGPS (at about 20%) is around 15% higher than the average employer pension contribution across all industries which is about 4.5%;
• there is some relief for many employers with contributions having reduced slightly on average.  Whilst a reduction of 1.1% may not seem a lot in the context of significant funding and inflationary pressures, every little helps!

For more information

Please contact Doug Mullen.

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