LCP estimates that councils could save £3 billion each year by cutting LGPS contribution

With the latest valuation of the Local Government Pension Scheme (LGPS) highlighting a surplus of c£22bn, LCP has estimated that if contributions reflected the current market the cash requirement from councils could be reduced by more than £3bn each year.

In a new blog, LCP’s Tim Gilbert estimates that the total surplus across all LGPS funds in England and Wales has increased to more than £100bn i.e. in aggregate the Funds are holding assets that are over £100bn more than they believe they need to pay the promised benefits. 

Despite the last valuation in March 2022 highlighting the high surplus levels, the updated contributions that came into effect from April 2023 made minimal changes. LCP estimates that councils across England and Wales are currently paying a total of more than £6bn pa into the LGPS for new benefits being built up, based on the position as at 31 March 2022. If contributions were recalculated based on current market conditions this could reduce the cash requirement from councils by more than £3bn each year, which is the equivalent of 2% of the total local authority budget in England and Wales in 2024-25.

It is not just councils that participate in the LGPS. Many other employers do, including not-for-profit entities such as charities, housing associations, academies and independent schools.

LCP believes a review of contributions now could help to protect councils’ financial positions and give greater certainty to council tax payers and central government ahead of any review of local government funding arrangements. Whilst the contribution rates are currently set for three years at a time, the LGPS Scheme Advisory Board suggests a review of contributions is possible on a fund-by-fund basis. 

While the flexibilities to reduce contributions described might not be available to all, there are steps that can be taken to reduce exposure to risks and take advantage of current market conditions. 

LCP is urging employers who participate in an LGPS fund to do the following:

• Review their current position,  
• Engage with the Fund to understand the options, and 
• Act on the option that is best for them.

Tim Gilbert, LCP Partner, commented: “It is clear from our analysis that many LGPS funds are in a significantly stronger position than expected when the contributions were set in 2022.  We know that national finances are tight, so the government should be prioritising clear guidance stating such a review of contributions is reasonable, and that they can be reduced as soon as possible where appropriate. This could help to protect councils’ financial positions and give greater certainty to council taxpayers and central government ahead of any review of local government funding arrangements.