Rob Bilton: The main question funds are considering is whether they ‘stick’ with the current allocation or ‘twist’ by removing some investment risk.
With so much going on around pooling in the Local Government Pension Scheme (LGPS), it’s easy to forget that 2025 is a triennial valuation year for LGPS funds in England & Wales.
However, ignore it at your peril. 2025 will require - more than ever before - a full exploration of options, decision-making and active engagement to ensure the valuations are a success
The LGPS enters the 2025 valuations in a position of funding strength. However, the key driver of this strength, a long period of strong investment returns, varies in magnitude between funds depending on the strategy they've adopted. So, the strength is not uniform across the LGPS – in simple terms one size does not fit all. And that's before we even consider the large amounts of uncertainty in the wider economic, demographic and political environment.
Collectively, this makes it difficult to draw definitive conclusions about what may happen to investment strategies, prudence levels and contribution rates at the 2025 valuations. Long gone are the times of deficits in the 2010s when the only question was by how much should the contribution rate increase.
However, after spending the last year working with LGPS funds advised by Hymans Robertson, we can share some of our early insights into the potential outcomes.
Investment strategy: stick, twist or expand?
The main question funds are considering in 2025 around their investment strategy, is whether they ‘stick' with the current allocation or ‘twist' by removing some investment risk. Sticking is attractive to some as the LGPS remains open to new members and accrual, so it needs long-term investment returns to keep contribution rates at affordable levels. However, some see the current strong funding positions, and relative attractiveness of current yields on bonds and credit, as reason for twisting and protecting funding balance sheets.
Sticking will serve some employers in a LGPS fund better than twisting and vice versa - as employer groups have different funding needs and priorities. It is for this reason that an increasing number of LGPS funds are using the 2025 valuation as an opportunity to explore whether they expand from a single investment strategy for all employers, to offering a choice of strategies. This is a trend that has been gradually increasing in the LGPS over the past decade as funds look at ways to best support the diversity of their employers' needs.
Prudence margins: managing the uncertainty
Prudence is needed in LGPS funding plans to provide protection. With so much uncertainty around what the future may hold, prudence helps to avoid making large knee jerk changes to contribution rates or investment strategy. With the heightened level of uncertainty in today's climate, most funds are looking to increase their prudence margins to offset this additional risk to deliver their funding strategy.
Of course, even with prudence margins in place, there is always the risk that the future will be more challenging than expected. Funds are also stress-testing their decisions under various alternative future economic scenarios to ensure funding plans are robust to the risks of long-term investment returns, or inflation being worse than expected.
Employer contribution rates: balancing multiple factors
The most complex decision for 2025 will revolve around contribution rates. LGPS funds must consider employer affordability, long-term stability, solvency, inter-generational fairness, financial market uncertainty, and potential local government reorganisations. The strong funding positions allow for some flexibility, but the focus remains on maintaining stability and longer-term affordability. Reducing contribution rates too quickly could lead to future increases, which may create future budgetary challenges for employers and potentially cost them more in the long-term.
Over the last six months, we have been working with LGPS funds advised by Hymans Robertson to set provisional contribution rates for local authorities, covering the period 2026 to 2029. This group of just over a 100 represents about a third of all local authorities across England & Wales. The analysis reveals that nearly every authority in the sample will see a reduction in contribution rates at the 2025 valuation, truly reflecting the strong funding positions.
The magnitude of the reduction varies. Authorities currently paying less than 20% of pay are typically seeing modest reductions of up to 3% of pay over the 2025 valuation cycle (April 2026 to March 2029). In contrast, authorities paying more than 25% of pay are seeing greater reductions. This suggests good news for employers, with funds providing employer contribution rate relief due to strong investment performance over the past couple of decades.
Be prepared for a valuation of positive uncertainty
The strong funding position provide good news for the 2025 valuations, but the uncertainties in the wider environment necessitate a cautious approach.
Overall, the 2025 valuations will not just be about numbers; it will also be about making decisions that will need to factor in wider qualitative factors. Some of these will be specific to a fund's local circumstances and some will have much broader economic impacts.
We would urge funds to be prepared to explore all options, spend more time making decisions, and then explain these outcomes to various stakeholders.
As an industry, we must be prepared to see more variation in outcomes as LGPS funds take different - but equally valid - approaches to setting investment strategy, prudence levels and contribution rates. As we are well aware, there is no definitive right or wrong answer when it comes to the long-term funding of pension schemes.
Rob Bilton is head of LGPS actuarial at Hymans Robertson
