Kensington and Chelsea in “unprecedented” move to cut LGPS employer contributions to zero

Kensington and Chelsea local authority pension fund’s investment committee have defied actuarial advice to vote through the change – and could face backlash from central government, members and the regulator.

The move has been described as “unprecedented” by the pension fund’s own officers.

Council documents show that officers and the scheme actuary have warned of potential legal action from the Ministry of Housing, Communities and Local Government (MHCLG) and the Pensions Regulator.

The pension fund, part of the Local Government Pension Scheme (LGPS), had a funding level of 207% as of 30 June 2024 and expects this strong position to be maintained following its next triennial valuation.

The borough council pushed for a review of the employer contribution rate in light of the strong funding position. The contribution rate was initially set at 15% for 2025-26, following the fund’s 2022 valuation.

At a meeting of the investment committee on 4 February, councillors agreed to reduce this rate to zero as it believed this would not materially affect the pension fund’s position.

However, the fund’s actuary refused to endorse the move and has warned that central government could intervene if the council goes ahead.

The council had sought legal advice on its ability to reduce the rate without actuarial certification.

Reducing the employer contribution rate
In his written report to the committee, Steven Scott of Hymans Robertson acknowledged the improved funding position of the pension fund and proposed a reduced employer contribution of 7.5% – half the original rate.

Pension fund officers supported this decision, according to council documents, and the council has already earmarked savings of approximately £7.3m from this move to be transferred into a “budget stabilisation reserve”.

Previous savings from lower contributions have been redirected towards financial support for victims of the 2017 Grenfell Tower fire.

But in an additional note outlining a conversation with key staff on the potential zero rate, Scott warned that “the necessary analysis, due diligence and consultation required” for a zero contribution level “has not happened”.

He agreed with the council’s assertion that the zero rate would not materially affect the pension fund’s position, but warned of several ramifications of the decision.

The rate will apply to the council in its capacity as an employer for the scheme, as well as local education authority schools. Other employers’ rates will not change.

Government and members could object, actuary warns
“MHCLG, in particular, have been vocal in their opposition to contribution reviews for reasons of a change in the council covenant or due to financial hardship,” Scott said.

“The payment of a nil rate would be flagged to MHCLG and, in my view, it is likely that they would investigate and possibly intervene if they were of the view that the reasons for the contribution review are not consistent with the regulatory regime.”

Scott also highlighted that pension fund members could raise objections to employers benefitting from the surplus position while the members’ average contribution rate remains at 7.3%.

“We would expect any decision to set a nil rate to be fiercely contested by member representatives, at both a local and national level,” he said.

“We know from our experience sitting on national LGPS groups that member representatives are concerned about the cost of the scheme to members, and that any reduction in employer costs to a level below the member cost would be opposed on the basis that members should also be benefiting from a surplus that they contributed towards.”

Scott and pension fund officers also highlighted that the decision could set an expectation among employers that a zero rate is sustainable beyond the 2025-26 financial year.

Budget pressures putting staff in “difficult position”
Tim Gilbert, partner at LCP, said reducing the employer contribution to zero could save the Kensington and Chelsea council more than £10m, based on last year’s data, or approximately 6% of its annual budget.

The council is currently expecting a 7.5% contribution rate for 2024-25, according to budget documents. Council leaders will discuss the borough’s budget at a meeting on 12 February.

In a post on LinkedIn, Gilbert said: “It is obviously not simple to adjust the contribution rates mid-valuation cycle, and there is plenty of guidance from the Scheme Advisory Board on what should (and should not) be allowed for.

“This puts fund actuaries and council members in a difficult position and is exactly why we and others having been calling for updated guidance reflecting the current position of many LGPS funds and pressure on councils.”

It comes as many councils are struggling with reduced budgets and cost cutting.

Councillor Roger Phillips, chair of the Scheme Advisory Board, wrote to council finance chiefs last week urging them not to cut the budgets of their pension teams because they may suffer consequences if they fail on service delivery.

At the same time, the government is exploring how to give private sector defined benefit pension schemes more powers to free up surplus assets.