Average total contribution rates across the UK’s Local Government Pension Schemes (LGPS) have decreased from 22.9% in 2019 to 21.1% in 2022, according to analysis of the 2022 valuation published by the LGPS Advisory Board (SAB).
The report, produced with the help of Barnett Waddingham, includes data collected from 85 of the 87 funds, with two Environment Agency funds being excluded from the analysis.
The 2022 valuation saw a “significant” improvement in funding levels compared to 2019 – raising from 98% to 107% – with all funds reporting an improved funding position.
The report said that this is a “positive” outcome for the LGPS, “although recent events, in particular the impact of high inflation on liabilities, will bring challenges for the period to the next valuation”.
The purpose of the valuation is to set employer contribution rates in each fund for the period from 1 April 2023 to 31 March 2026.
Across the analysed funds, the report said there is a “significant” variation in the average total contribution rate – ranging from a drop in total equivalent contributions of 27.1% of payroll, to an increase of 7.9% of payroll.
The average change was a decrease of 1.5% of payroll, generally reflecting the reduction in secondary rates - due to strong asset performance helping to reduce deficits - balancing out the increase in primary contributions.
The report added: “However, contributions are paid on an individual employer level rather than a whole fund level, and we expect even more variation at the individual employer level.”
McCloud cost
In 2014, the LGPS switched from a final salary scheme to a career-average scheme, which included transitional protection known as an ‘underpin’ for members closest to retirement.
However, the 2018 ruling by the Court of Appeal, known as the McCloud ruling, found these changes discriminated against younger members of public sector pension schemes.
As a result, the government consulted on a proposed remedy which would see the underpin extended to an estimated 1.8m of LGPS members to ensure they would not receive a lower pension because of the reforms.
According to the valuation report from SAB, across the 85 funds analysed, the cost of McCloud was estimated to be £1.6bn (0.5%) of liabilities on a local funding basis.
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