The results are starting to come through for the employers in the local government pension scheme (LGPS) and the picture is likely to be mixed - there may be an improvement to the funding position but that won't necessarily translate into lower contributions. It could, however, make an exit more affordable.
Early indications were that, on average, funding levels for benefits already built up would improve by 7 - 12%. This has been driven by strong investment returns and lower levels of inflation in the past. This has been despite higher-than-expected salary increases.
However, this doesn't automatically mean that employers will see lower contribution rates. With an increasing number of employers going into surplus and rising financial pressures on many organisations, lower contribution rates would not only be welcome but even merited. However, the LGPS Advisory Board has called for caution, referencing the war in Ukraine, the highest inflation in many years and rising interest rates. Their view is that, even if the contributions towards past benefits decrease, the cost of paying for future benefits may well increase because of these factors. This increase may well offset the reduction in the contributions towards past benefits so that employers see little change in contribution rates.
Employers should also be aware that their results may be quite different to the average due to the profile of their workforce and the difference in investment performance between LGPS funds.
For employers looking to leave the LGPS, an improved funding position may well help with an exit strategy even if their contributions don't reduce. A better funding position will mean a lower exit payment or maybe even a surplus on exit.
We're talking to a number of employers currently about exiting on the basis of improved funding positions with some exploring deferred debt agreements, debt spreading agreements and agreements with other LGPS employers to take on their pension assets and liabilities in the LGPS. For a conversation about this, contact Doug Mullen.
Council pension funds have been urged to be cautious about reducing employer contribution rates despite increasing surpluses