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England’s cash-strapped town halls are expected to cut the amount they pay towards staff pensions after a dramatic improvement in scheme funding levels.
The £391bn Local Government Pension Scheme in England and Wales is in surplus by £85bn, according to calculations by pension consultant Isio.
The estimate compares with official figures of a £22bn surplus in 2022 and a deficit of £6bn in 2019. The change has been driven by a rise in corporate and government borrowing costs, which has pushed up expected returns for pension schemes.
LGPS funds conduct valuation exercises that determine how much councils pay in every three years. The next one is this spring, with any changes to contribution rates due to come into force in April 2026.
“The market conditions since the last valuation have changed massively,” said Tim Gilbert, partner at Lane Clark and Peacock consultants. “That supports a significant reduction in the contribution rates . . . a reduction of 50 per cent or so is justifiable given the change of the conditions.”
Employer contributions to the LGPS in England and Wales amount to about £8bn a year, including some non-council employers, the equivalent of close to 6 per cent of the total budgets of local authorities. The average employer contribution rate is 21 per cent of staff salaries.
“Given the funding pressures on councils it’s huge,” Gilbert said. The core spending power of English councils in 2024-25 is 18% lower in real terms than 2010-11 levels, according to the Special Interest Group of Municipal Authorities, which represents local authorities.
Birmingham city council, for example, which is in effect bankrupt, pays an employer contribution rate of about 27 per cent into the West Midlands Pensions Fund, which had a funding level of 116 per cent at its latest valuation in 2022.
Some Scottish councils have already slashed their pension contribution rates as their triennial valuation operates a year apart from England and Wales. The most recent was in 2023.
However, some consultants have warned LGPS funds to exercise lower contribution rates with caution, as the funds could swing into deficit if market conditions change. The LGPS has about half of its assets in equities.
“Deficits can reappear, particularly if you are in a situation where you are carrying significant investment risk and there is no hedging in place. Market conditions change. In 2016 everyone was thinking how will we be able to close this hole on a number of funds?” said Mark Jennings, partner at PwC.