More guidance is needed for UK local councils looking to reduce pension contributions, according to LCP.
The call comes as Kensington and Chelsea Pension Fund’s investment committee voted for council pension contributions to be cut to zero for the next financial year.
According to LCP, the move by the council comes against the backdrop of the Local Government Pension Scheme (LGPS) having an estimated surplus of more than £100bn.
Councils across England and Wales are currently paying more than £6bn per annum into the LGPS for new benefits being built up and the contribution rates were last set based on the position as at 31 March 2022.
The actual contribution rate required to provide for these new benefits, based on the position today, could be half the rate at 31 March 2022. This means councils could reduce their contributions, freeing up more money to spend on local services.
However, according to Tim Gilbert, partner at LCP, there should be more guidance on how councils should make such requests and how funds should consider these requests given other councils may soon follow suit.
Gilbert believes the current situation leaves fund actuaries and committee members in a “very difficult” position.
Accounts show the Kensington and Chelsea Pension Fund as a whole had assets at 31 March 2024 of more than £1.8bn.
The total council contributions to the fund were around £10m in the year to 31 March 2024 – equivalent to 6% of the £175m services budget for the council over the same period.
The report from the council’s investment committee on 4 February said that given its funding level reduction in contribution rates “would have only a marginal impact on future outcomes and should not have a detrimental effect on the ability of the fund to pay pension benefits”.
The report also noted that the reduction in contribution rates to 0% would save the council £9m over the year to 31 March – which it said could have a material impact on the council’s ability to provide services.
However, the move was not supported by the fund’s actuary Steven Scott of Hymans Robertson.
In a separate report, Scott said: “At a meeting held on the evening of 21 January 2025, I confirmed that I would not be able to certify an employer rate of 0% for the 2025/26 year, at the current time.”
He cited the importance of “wider governance and risk implications” and added: “It would be inappropriate for me to set the rate at this level as part of an inter-valuation contribution rate review (or indeed at any level lower than 7.5% of pay).”
Scott added that the regulatory framework “does not permit allowance to be made for current market conditions when reviewing contribution rates between formal triennial valuations” and therefore he “cannot certify a nil rate as the necessary analysis, due diligence and consultation required to do so has not happened”.
He added that reducing the rate to 0% may lead to expectations that this is a sustainable rate in the long term.
However, according to Gilbert, Kensington and Chelsea will not be the only council considering reducing their employer contribution given the current strong funding levels in the LGPS and the pressures on finances across the public sector.
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