A rise in the number of people retiring following the pandemic contributed towards a 6.6 per cent increase in Local Government Pension Scheme expenditure, new data from the Department for Levelling Up, Housing and & Communities has revealed.
Total LGPS expenditure in England and Wales in 2021-22 was £14.4bn, an increase of £0.9bn on the previous year.
It comes on the back of a 14.2 per cent uptick in the number of retirements made throughout the year. There were 94,724 retirements in the LGPS in 2021-22.
The DLUHC suggested the rise may be a statistical rebound due to people being unable or unwilling to retire during the coronavirus pandemic, with more people choosing to retire as the pandemic abated.
Funds will need to closely examine their evolving cash flow requirements
Robert McInroy, Hymans Robertson
Employer contributions down
Sixty-five out of 85 authorities submitted data based on their provisional accounts.
Income to LGPS schemes in England and Wales in 2021-22 was £15.9bn – a decrease of £1.4bn, or 8.1 per cent – but the DLUHC said this is common after every third year. It said many employers make early payments for three years at a time, so the value for last year was higher than usual.
Likewise, employers’ contributions to the LGPS fell by almost a quarter (24.3 per cent) to £7.8bn, due to a higher than average value in the previous year.
Employees’ contributions to the scheme were £2.6bn, an increase of 4.8 per cent, while investment income underwent an increase of 21.2 per cent over the year.
The DLUHC said the increase may be due to an improving investment market as the global economy recovered from the coronavirus pandemic.
The market value of LGPS funds at the end of March 2022 was £364bn, an increase of £26.9bn, or 8 per cent.
The LGPS currently has a total membership of 6.3mn people, 2mn of whom are employees who still contribute to the scheme.
Pensioners make up 1.9mn of its members, while 2.3mn are former employees who are entitled to a pension at some time in the future.
LGPS under the spotlight
The publication of the LGPS’ accounts comes amid a turbulent period for local authority schemes, affected by inflation and industry developments.
October 19 saw the Office for National Statistics confirm September’s inflation figure of 10.1 per cent. This will result in a like-for-like increase in LGPS benefits next April, according to Hymans Robertson partner Robert McInroy.
He said the increase would be the highest “in a generation” and will necessitate LGPS finding more cash to meet the growth in liabilities.
He said: “On the investment side, funds will need to closely examine their evolving cash flow requirements. It will be important to have up-to-date forecasting under a range of inflationary best-estimate and stress test scenarios.
"However, the open-ended nature of LGPS liabilities means the largest risk for most funds might stem from inflation remaining higher for longer and the challenge of earning a long-term rate of return above inflation.”
But the need to progress funding comes amid a backdrop of inflationary and market uncertainty. McInroy said most employers will be able to ride out the short-term volatility risks, but special attention must be paid to the impact on shorter-term employers to ensure current levels market risks are considered.
“After a decade of very low inflation, there is much for LGPS funds to do in order to quickly grasp and navigate the emerging issues,” he added.
Last month, the LGPS confirmed that its first climate risk reports will be published in 2024, with a government consultation running until November 24. The DLUHC said LGPS’ “scale and market power give it an opportunity to drive change through the investment chain through asset managers to investee companies”.
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Meanwhile, LGPS Central, the body which manages around £49bn in assets on behalf of eight Midlands-based LGPS partner funds, said it expects to break even on cost savings by 2023 following a £42.8mn saving in investment management fees.
Net savings of £127mn are expected to be made by 2034.
LGPS Central’s chief executive Mike Weston stated the pool is focused on “strengthening the corporate collective frameworks that are providing significant savings on the investment management fees”.
