The Local Government Pension Scheme (LGPS) funding level dropped to 101% for the period ending 31 December, from 108% for the period ending 31 October, when the LGPS Low-Risk Funding Index was last published by consultancy Isio.
However, Isio believes that funding levels have likely improved since they were last recorded.
It attributed the short-term fall in funding levels to reductions to UK government bond yields and higher inflation, which increase the value of low-risk liabilities, partially offset by increases to asset values.
The index has also been updated to reflect the anticipated CPI linked 6.7% increase to be applied to LGPS benefits from 1 April 2024.
It showed that of the 87 participating funds, 44 have funding levels of 100% or higher, with levels ranging from 67% to 148% funded.
However, Isio said that since 31 December 2023, its initial analysis suggests funding levels have improved from 101%, indicating that the year-end was a short-term funding low point.
It added that this presents further evidence that the fully funded positions are here to stay and should prompt a review of funding and investment strategies.
Steve Simkins, partner and public services leader at Isio, said: “Despite recent uncertainty in global bond markets, our index shows that the significantly improved funding levels for LGPS funds and their participating employers remain relatively stable at these new, much higher levels compared to 31 March 2022.”
He added that employers participating in the LGPS continue to struggle to meet ongoing costs and their pensions contributions, which now look excessive, often represent a large proportion of their cost base.
“It was therefore positive to see the Scheme Advisory Board’s recent note on LGPS surpluses, including inter-valuation contribution rate reviews and de-risking matters, addressing what was already a healthy LGPS funding position at 31 March 2022,” he said.
“However, we are concerned that there is not sufficient recognition of the significant improvements for all LGPS funds since then. This is particularly relevant for local authorities who face serious financial pressures and for whom a reduction in pension contributions could make a significant difference,” Simkins noted.
He encourages employers, particularly local authorities “to engage with their respective LGPS fund to consider their challenges and individual circumstances to make a case for short-term reductions to contributions, enabling delivery of essential public services to local communities and retention of local jobs”, he concluded.
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