LGPS in surplus as assets hit record £400bn

The consultancy group’s Low-Risk Funding Index also estimated that assets under management across the Local Government Pension Scheme (LGPS) were almost £400bn at the end of March, a record high for the system.

The funding level of 106% is a slight increase from January’s 104%, but marked a substantial improvement from the estimated 67% recorded at the scheme’s last formal actuarial valuation as of 31 March 2022.

Of the 87 LGPS funds in Isio’s index, 55 had funding levels of 100% or higher at the end of March, with ratios ranging from 68% to 159%. Just two years ago, none of the schemes were 100% funded.

The increase in assets was largely driven by a rally in global equity markets, Isio said.

‘Tension’ over strategy

With less than 12 months until the LGPS system’s next formal actuarial valuation date – 31 March 2025 – Steve Simkins, partner and public services leader at Isio, said there was a “tension” between “long-term funding strategies and short-term planning for the next valuation to secure the best outcomes for their employers, some of whom would welcome cost and investment risk reductions”.

“Locking in some of the gains made from the current equity market highs presents an opportunity to achieve both,” Simkins said.

Two years ago, LGPS funds and employers were “reliant on future equity returns”, he said, but many were now in a much better position. However, as the situation varies depending on the sponsoring employer rather than the LGPS fund in question, he said it could lead to a “greater range of investment strategies emerging across LGPS funds” as they seek to cater for different needs.

Andrew Singh, associate director and head of public sector investment advisory at Isio, said: “Given the market movements we have seen it might be necessary for funds to re-balance assets back towards the strategic allocation, or go further and review the strategic allocation.

“While investment strategies are built for the long term, there are times when short-term considerations come into play and with the next actuarial valuation looming this might be one of those times.”

Isio’s analysis of strategic asset allocations, derived from fund annual reports for the 12 months to 31 March 2023, suggested that funds within the LGPS system were taking “small steps” to lock in investment gains and protect their funding levels.

However, Isio said that “despite the shift on an aggregated basis, a number of funds actually increased their risk” over the period.

Further reading

What the Budget means for the LGPS (6 March 2024)

LGPS system funding improves through January (27 February 2024)