With 12 months until the next actuarial valuation, the funding level for the UK’s Local Government Pension Scheme (LGPS) has improved to 106% as at 31 March 2024, from 67% as at 31 March 2022, the time of the scheme’s last actuarial valuation, according to Isio’s Low-Risk Funding Index.

Isio attributed the improvement primarily to rises in asset values, in particular growth assets given the surge in equity markets across the globe. It said that asset values have hit a record high at nearly £400bn, just one year out from the next actuarial valuation.

It pointed out that of the 87 participating funds, 55 have funding levels of 100% or higher, with funding levels ranging from 68% to 159%.

At the previous actuarial valuation date, 31 March 2022, the aggregate low-risk funding position was 67% and none of the 87 funds had a funding level of 100% or higher on a low-risk basis.

Isio added that with only 12 months to go until the next actuarial valuation, these results provide “further evidence” that ongoing funding levels for LGPS funds and their employers are expected to be higher than at 31 March 2022, meaning that surpluses will have increased further.

However, there is a risk that equity markets fall over the next 12 months, negatively impacting funding and causing some individual funds and their employers to move below a 100% funding level on a low-risk funding basis, Isio warned.

It said that this creates an “immediate challenge” across LGPS and funds could consider taking a shorter-term view to lock in some or all of the current equity market highs, or whether a long-term view should prevail.

Steve Simkins, partner and public services leader at Isio, said: “Higher assets, combined with higher long-term yields, are a recipe for improved pension scheme funding. While the LGPS takes a very long-term perspective on funding, the evidence suggests that ongoing funding positions and surpluses have further improved since the 31 March 2022 valuation.

Inflation and REITs

LGPS funding level improved from 67% at 31 March 2022 to 106% as at 31 March 2024

Simkins said that this creates a tension between LGPS funds’ 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.

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

He added that at 31 March 2022, with very few exceptions, LGPS funds and their employers were reliant on future equity returns but this position has changed with over half of LGPS funds and their employers moving into a self-sufficient position.

Therefore, he said that the traditional “one-size-fits-all employers” investment strategies are becoming less appropriate and there might be a greater range of investment strategies emerging across LGPS funds.

Andrew Singh, associate director and head of public sector investment advisory at Isio, added that current market conditions provide an unexpected opportunity for LGPS funds to review the risk levels associated with their investment strategies.

But he pointed out that reducing investment risk does not necessarily have to mean transitioning all the way from ‘growth’ equities to ‘protection’ bonds and it can instead involve modest reductions to expected returns in exchange for more contractual investment return profiles.

He 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-time, there are times when short-term considerations come into play and with the next actuarial valuation looming this might be one of those times.”

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