LGPS urged to deploy record £45 billion funding surplus

The Local Government Pension Scheme (LGPS) ended the first half of 2024 with a record £45 billion funding surplus, according to Isio.

The consultancy group’s Low-Risk Funding Index showed that the LGPS in England and Wales had an aggregate funding level of 112% at the end of June, up from 110% a month earlier.

Funding levels for individual funds ranged from 71% to 169%. Across the 87 funds in England and Wales, 69 were fully funded at the end of June.

Rising equity prices during the month were the primary driver of the funding improvement, Isio said, with an additional boost from a fall in inflation expectations.

Steve Simkins, partner and public services leader at Isio, said more attention should be paid to what the LGPS can do with its funding surplus.

“The LGPS is currently so unexpectedly well-funded that there are wider opportunities to utilise the assets while maintaining benefits security and long-term contribution stability,” he said. “Given the size of the assets involved we would encourage a broad and joined-up debate.”

Surplus options
The LGPS results echo similar funding improvements for private sector defined benefit schemes. This has given rise to a consultation about new rules and flexibilities for trustees to access surpluses for the benefit of members and sponsors.

Meanwhile, the government has singled out the LGPS in the first stage of its Pensions Review, citing “fragmentation and waste” within the system. The government aims to reduce the estimated £2 billion spent on investment costs, while also promoting larger allocations to UK productive finance.

Simkins said there was a “natural tension” between the goals of reducing costs while investing in more complex and potentially risky asset classes.

“Instead of focusing on the assets in isolation, more attention could be given to the surplus within the LGPS and how this can be used more directly to influence the UK economy,” Simkins said.

For example, he said local authorities could use their funding surpluses to reduce contributions and redirect capital to essential services. They could also cut contributions for external employers such as housing associations and universities, with the money saved then spent on investment in housing and education.