Local Government Pension Scheme (LGPS) funds have strengthened funding levels from deficits to comfortable surpluses over the past three years, according to Hymans Robertson, in its latest triennial report.

According to LGPS 2022 Valuation: The Big Picture, the overall funding level has risen from 98.5% at 31 March 2019 to 107% at 31 March 2022.

The report, which analysed results from 73 of the 86 LGPS funds in England and Wales over the three-year time period, also predicted a robust outlook for their long-term sustainability.

Robert Bilton, partner and head of LGPS valuations at Hymans Robertson, and the report’s author, said, “The main takeaway is that higher short-term inflation has been more than offset by better than expected investment returns. Our analysis indicates that the average increase in fund asset values was 27.5%, with some individual funds well over 30%.”

The improved funding position has meant that schemes have been able to reduce the level of contribution rates as at March 2022, with average employer contribution rates falling from 21.9% at March 2019 to 20.8% of pay at March 2022.

The report includes a chart comparing funding levels for individual schemes, the real discount rate the funding level is based on, and the likelihood of the fund’s investment strategy achieving that discount rate.

This allows comparison between funds with similar funding levels and the same future assumed real return, but using different assumptions in their investment strategies.

“What is key is that there are variations between funds because of their different histories,” Bilton told IPE. “The good news for the LGPS is that the funding positions for all schemes are positive – there are no individual schemes with a low funding level that are relying on a future investment return which has a relatively low likelihood of being achieved. The lowest likelihood in the analysis was 60%.”

However, he added that schemes should be monitoring the funding position, and understand how it is evolving.

“The funding position will move around because of volatility in assets such as equities,” he observed. “But schemes still need to invest in assets carrying risk, in order to get a return, otherwise contributions will become unaffordable.”

According to Bilton, other necessary actions include reviewing further sources of uncertainty which could end up affecting the funding level.

“Ill-health risk should be managed and mitigated, while funds need to be aware of changes in life expectancy,” he told IPE.

And funds should also be looking at cyber-risk, he said: “Some schemes hold a lot of data themselves about members, so a cyberattack could lead to a shut-down or loss of data.”

Bilton also highlighted the impact of the 2018 McCloud judgement, which relates to new schemes introduced under the pension reforms of 2013, and therefore, all public sector schemes.

The ruling said that transitional measures allowing older scheme members to remain within legacy schemes, instead of moving to the new schemes, discriminated against younger members.

The government has set out how this discrimination should be remedied.

The report concluded that on average, the impact of McCloud is estimated to be a 0.4% increase in liabilities, equivalent to around £1.3bn for the 73 funds covered by the report.

“Funds should make sure they have the necessary membership data from employers to be able to comply with McCloud”, Bilton advised.