Government to consult on changes to LGPS contribution rules after Kensington & Chelsea decision

The Ministry for Housing, Communities and Local Government is expected to review rules around changes to contribution rates in the wake of a controversial decision by one LGPS fund.

Last month, the Royal Borough of Kensington and Chelsea’s investment committee voted to reduce the employer contribution rate to zero for the 2025-26 financial year – against the advice of the fund’s actuary.

The committee exercised its power under regulation 64A of the LGPS Regulations 2013, which allows for contribution rates to be reviewed between triennial valuation cycles in some circumstances.

However, in a letter to LGPS administering authorities sent on Monday, the Ministry of Housing, Communities and Local Government (MHCLG) said the regulation was not intended to be used as a way to manage surpluses.

The Kensington and Chelsea fund is over 200% funded, according to council documents.

In the letter, Michelle Warbis, deputy director of local taxation and local government pensions at the minsitry, stated: “MHCLG considers that revised contribution rates should not be applied to local authority employers in order to manage surpluses or deficits that have not yet been confirmed as part of the valuation process.”

Regeulation 64A was intended only to allow contribution changes if an employer’s liabilities change or it becomes unable to meet its obligations to the pension fund, Warbis explained.

“As it is clear that the intended and actual usage of 64A are not aligned, the government intends to consult on changes to the regulations as they apply to revision of contribution rates (including on the role of the fund actuary),” Warbis concluded.

The LGPS Scheme Advisory Board said it would “continue to work closely with MHCLG to input into and bring forward proposals that better deliver the policy intent”.

Kensington and Chelsea’s actuary, Steven Scott of Hymans Robertson, warned the committee that reducing the contribution rate to zero could result in interventions from the Pensions Regulator or MHCLG.

Following Kensington and Chelsea’s decision, Tim Gilbert, partner at LCP, said other LGPS funds would likely be in a similar position following the next valuation, as of 31 March 2025.

“Kensington and Chelsea won’t be the only LGPS fund in this situation, given the current strong funding levels in the LGPS and the pressures on finances across the public sector,” Gilbert said.

According to LAPF Data Services, a service from DG Publishing, 61 of the 86 LGPS funds in England and Wales were at least 100% funded as of 31 March 2022.