Councils reducing their LGPS contributions: Why and what’s next

It has been reported that the Royal Borough of Kensington and Chelsea Pension Fund’s Investment Committee have voted for Council pension contributions to be cut to zero for 2025-26.

This is a significant move, and a report for the Investment Committee meeting shows debate around the level of contribution rate reduction that could be justified and the mechanism for doing so. I don’t expect the recent vote will be the end of the story!

In this blog, we take a step back and look at the circumstances of the Fund and the Council, the case for the Council to reduce contributions, and the key considerations the Fund may take into account in making any decision to revise the rate.

The Pension Fund

The Kensington & Chelsea Pension Fund had the highest funding level of any LGPS fund in England & Wales at the last valuation – 164% on the Scheme Advisory Board (SAB) basis. It has also delivered strong investment returns recently (it was described as "the UK's best performing council pension fund" in the FT just before Christmas).

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.

In this case, there appears to be a large buffer already so we can see why the Council would focus on the option to reduce costs.

Accounts show the Kensington & Chelsea Pension Fund as a whole had assets at 31 March 2024 of more than £1.8bn. Based on the 30 June estimated funding level of 207% it’s probably reasonable to assume total surplus assets in the Fund of at least £1bn at the current time. It is not therefore surprising that there is a proposal for contributions to stop, given the funding position.

The Council

Total Council contributions to the Fund were around £10m in the year to 31 March 2024 - equivalent to 6% of the £175m services budget for the Council over the same period.

Reports suggest reducing the contribution rate to 0% in 2025/26 would save the Council £9m over the year to 31 March 2026. This could have a material impact on the Council’s ability to provide services (for example - the November 2024 budget consultation showed a “budget gap” of between £14m and £24m in 2025/26).

It is being reported that this £9m saving will be put into the Grenfell Recovery Fund. The Royal Borough of Kensington and Chelsea’s accounts show £8.2m contributed to this Fund in 2023/24.

This shows the difficult decisions that the Council must make going into next year. There has been talk of the Ministry of Housing, Community and Local Government (MHCLG) blocking a reduction. Is the department really going to say the Council needs to cut services to put money into a pension fund with more than £1bn of surplus assets?

Implementing a change

With new contributions due to come into force from 1 April 2026 in any case, any change to the existing rates would only apply until 31 March 2026.

It is not simple to adjust the contribution rates mid-valuation cycle, and there is existing guidance from the SAB on what should (and more importantly should not) be allowed for in determining whether such a review could take place – the “nots” include updating for current market conditions and a change in the financial position of an employer being sufficient for a review of contributions (that is, these are not in themselves sufficient for a review).

This guidance was no doubt appropriate at the time it was drafted, but the combination of huge increases in funding levels and increasing strain on public sector finances could prompt a change in approach – and we suggest the SAB and the MHCLG should consider this as a matter of urgency.

Other observations

I am usually very cautious of comparisons between the LGPS and private sector DB schemes due to the different regulatory regimes and in most cases very different strategies the schemes are following. However, this type of contribution reduction would very likely be agreed for a private sector scheme in the same situation.

We have recently worked with clients who participate in the LGPS as admitted bodies, who have agreed that surplus assets in their section can be used to pay future contributions.

Such agreements are made on an individual employer basis, and the approach to agreeing and implementing varies widely across the different funds, but shows that councils and other employers could benefit further from unlocking surplus assets.

Next steps

I would be very surprised if Kensington and Chelsea is the only LGPS fund currently considering such a request, given the current funding levels in the LGPS and pressures on finances across the public sector.

We have consistently been calling for updated guidance on how councils should make such requests, and how funds should consider them.

The current situation leaves Fund Actuaries and committee members in a very difficult position. For example, the report for the K&C Fund notes that setting a nil rate “would have only a marginal impact on future outcomes and should not have a detrimental effect on the ability of the Fund to pay pension benefits”, whilst also noting the actuary’s conclusion that in the circumstances the current guidance may not permit such a reduction.

Looking slightly further ahead, as we approach the 2025 valuation we expect some big changes in contributions if financial markets remain similar up to the end of March. 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 – which could mean rates going up as well as down.

If you are an employer in the LGPS and would like to discuss your options, please contact our specialist team.

Note: LCP do not advise the Royal Borough of Kensington and Chelsea Pension Fund, nor the Royal Borough of Kensington and Chelsea. All information and data in the blog is based on publicly available information and our interpretation of the guidance.