More guidance needed for councils looking to reduce pension contributions

Following the announcement that the Royal Borough of Kensington and Chelsea Pension Fund’s investment committee have voted for Council pension contributions to be cut to zero for the next financial year, LCP are calling for updated guidance for how councils can make such requests.

The move by the Council comes against the backdrop of the Local Government Pension Scheme (LGPS) having an estimated surplus of more than £100 billion. Councils across England and Wales are currently paying a total of more than £6 billion pa into the LGPS for new benefits being built up. The contribution rates were last set based on the position as at 31 March 2022. The actual contribution rate required to provide for these new benefits, based on the position today, could be half the rate at 31 March 2022. This means that Councils could reduce their contributions, freeing up more money to spend on local services.

In a new blog, LCP’s Tim Gilbert is calling for updated guidance on how councils should make such requests, and how funds should consider them given other Councils may soon follow suit. He believes that the current situation leaves Fund Actuaries and committee members in a very difficult position. The report for the Kensington & Chelsea Fund notes “would have only a marginal impact on future outcomes and should not have a detrimental effect on the ability of the Fund to pay pension benefits”, whilst also noting the actuary’s conclusion that in the circumstances the current guidance may not permit such a reduction.

Tim Gilbert, Partner at LCP, commented: “Looking slightly further ahead, as we approach the 2025 valuation we expect some big changes in contributions if financial markets remain similar up to the end of March. Given the huge swings in funding positions we have seen recently, we think LGPS Funds should build contribution flexibility mechanisms into the results to give greater scope for reflecting future changes.

“Given the structure of the LGPS, Funds that have delivered strong investment returns should consider what they are looking to achieve. They may wish to build up a reserve to protect against future risks, or to reduce the cash cost of providing benefits.

“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.”