The funding gap of the Local Government Pension Scheme (LGPS) has improved by £9.2bn since 2013 but last year's difficult market conditions reduced returns to just 0.1%.
According to the 2016 annual report published today by the Scheme Advisory Board (SAB), the total actuarial deficit of the LGPS fell to £37bn as of March 2016, while the funding ratio has rose to 85.3%.
This is a significant improvement since the March 2013 triennial valuation when the funding gap was £46.8bn with a ratio of 79%.
However, comparisons between the SAB's 2016 and 2015 figures show that last year was a challenging year for the LGPS, with assets stagnant at £217bn and investments delivering poor returns.
The net return on these assets after fees as of 31 March 2016 was just 0.1% compared with 12.1% in 2015, and much lower than previous years. In 2014 the scheme delivered net returns of 5.9% and in 2013 it was as high as 12.5%.
Speaking at the Pensions and Lifetime Savings Association's LGPS conference today, SAB chairman Roger Phillips said the 2016 figure reflects less favourable financial market conditions than the previous year.
The 2016 report also shows the LGPS's total membership grew by 134,000 to 5.3 million members compared to 2015, while the number of employers also rose to over 14,000 from 11,000.
The scheme continued to be cashflow positive, with income totalling £13.4bn and expenditure at £10.9bn. However, as had been expected, benefits being paid out are now slightly higher than contributions, but Phillips said this was no cause for immediate panic.
Despite the welcome deficit fall since the last triennial valuation, the board has been developing proposals to further tackle the £37bn gap to improve the sustainability of the LGPS and its future funding.
Phillips said at a time of "unprecedented change in local government" with major cuts to funding, the need for the LGPS to show "good management and governance has never been more important".
He also pointed towards the challenges faced by the "small team" at the Department for Communities and Local Government (DCLG), noting there is a "capacity issue", but that the local government minister Marcus Jones has been "excellent".
Phillips added that given DCLG is under purdah due to the forthcoming general election, this will hold up some things in its work programme.
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