Mansion House reforms: LGPS consolidation may work but a reduction in contributions would deliver relief to councils more quickly

Details of the Chancellor’s Mansion House speech released last night focus on consolidation in both the DC world and the Local Government Pension Scheme (LGPS).  Whilst consolidation could deliver greater efficiencies, does this miss a golden opportunity to relieve short-term financial pressures on local councils?

According to LCP Partner Tim Gilbert, in the short-term there are two key factors which so far have not  been addressed:

• Employers are currently paying in much more than they would be if contribution rates were set today - the expected cost of new benefits in the LGPS has fallen hugely since the rates were last set.  Last year employers put more than £9bn in contributions into the LGPS towards new benefits being built up. Even a modest reduction in 2025 could help councils and other employers who are currently having to make very difficult decisions on their budgets. 
• We estimate that LGPS assets in England and Wales now exceed £400bn, and the funding position is likely to have materially improved from the aggregate £22bn surplus at the last formal valuation in March 2022. This is a huge amount of money and allowing councils and other employers to benefit from the upside could help to support local development in the short-term.

Tim commented, “The Chancellor seems keen to accelerate the process of consolidating the LGPS assets into “megafunds”, aiming to deliver economic growth for the UK as a whole.

“Consolidation can help to deliver strong investment returns and efficiencies across the LGPS, allowing benefits to be provided more efficiently and at a lower cost to employers. The benefits members build up in the LGPS are set by legislation, which means that any additional investment return generated does not increase the amount of benefits members actually receive in retirement.  

“Many LGPS funds have historically delivered strong investment returns and invested in both the national and local economies. Any consolidation should look to build on, rather than replace, this. We cautiously welcome the plans but note that it will take time for consolidation to be implemented and for any benefits to emerge, and the Chancellor’s goals may not be achieved without careful planning.

“Whilst consolidation could deliver better performance in the longer-term there are other options to provide a short-term boost to council finances. Any decision must not be detrimental to the security of member benefits, but we think this can be achieved if the right protections are put in place, to deal with the situation if market conditions deteriorate.  

“Taking these steps could unlock additional funds in the next year, whereas any benefit from consolidation will not materialise for much longer.”