The Royal Borough of Kensington and Chelsea’s decision to cut the employer contribution to its pension fund to zero has raised questions about how Local Government Pension Scheme (LGPS) funds use their surpluses.
While the £1.8bn Kensington and Chelsea fund is an outlier in the LGPS system with a funding level of 224% as of 31 December 2024, many other funds are in strong funding positions.
In Scotland, for example, the average funding level across the country’s 11 LGPS funds rose from just over 94% in 2014 to almost 136% in 2023.
David Vallery, chief executive officer at the £10.2bn Lothian Pension Fund, told Pensions Expert’s sister title LAPF Investments that funds in this position had three options: do nothing, cut contributions, or change the investment portfolio’s risk level.
In 2023, Lothian’s triennial valuation showed a funding level of 157%. The fund opted for a mixed approach to using this surplus, Vallery explained. It cut employer contributions by around four percentage points, moved to a more cautious approach to valuation assumptions, and lowered investment risk by reducing its equity allocation.
The contribution cut will be more than covered by income from the investment portfolio, Vallery said.
The CEO acknowledged that, while contribution cuts are “generally considered a good thing by employers”, if levels need to rise again in the future it would be “much less welcome”.
He added that the stability of contributions was a central objective for many LGPS funds. “Large swings in contribution rates year-to-year are not practical,” he said.
Vallery said he expected employer contribution rates to fall following the 2025 valuation cycle, but said it was unlikely to be as “extreme” as some reports had suggested.
Declining investment returns, lower interest rates or higher inflation could all put pressure on the LGPS to increase contribution rates again, he explained.
For the full interview with Lothian’s David Vallery, access the digital edition of LAPF Investments.
All data sourced from PensionsPerformance.com, a DG Publishing service.
