With local authority finances under significant pressure and no sign of more money in the event of a change of government, creative ways to release money are very much in vogue. Surpluses in the Local Government Pension Scheme (LGPS) have led to calls for lower contribution rates to ease that pressure. So, is this a viable option or a pipedream?

The LGPS carries out a three-yearly valuation to set contribution rates. At the last valuation, LGPS funds were on average 107% funded and the position may well have improved from there. With the next valuation results not due to be shared until late 2025/early 2026 and then implemented in April 2026, changes to contribution rates using the three-yearly valuation process would be about two years away. Bearing this in mind, there’s been considerable focus on whether it would be legitimate to use interim valuations to change contribution rates.

LGPS funds have discretion around revising contribution rates but cannot do so whenever they like. Regulation 64A of the Local Government Pension Scheme Regulations 2013 governs the circumstances in which contribution rates may be revised:

• the relevant fund’s funding strategy statement needs to set out the administering authority’s policy on revising contributions between valuations; and
• one of the following conditions must be met:
  • it appears likely that the amount of liabilities has changed significantly since the last valuation; or
  • there has been a significant change in the ability of the employer(s) to meet their obligations to the LGPS; or
  • the employer has requested a review of their contributions and has undertaken to meet the costs of that review.

Looking at these conditions, it seems reasonably clear that LGPS funds could choose to consider revision of contribution rates if they wished to do so on an application to do so by one or more employers. Even if their funding strategy statement does not currently permit this, this could be updated.

The real question therefore is whether LGPS funds want to exercise their discretion to revise contribution rates in the middle of the three-yearly cycle.

Our view is that they may well not want to do so, for a number of reasons:

• Even if the cost of the review is covered, dealing with the administration that will accompany any such review will put extra pressure on resources at a time when funds are already grappling with Guaranteed Minimum Pension (GMP) revaluations, implementing McCloud remedies and getting ready for connection to the pension dashboard project.
• Reducing contributions at a time when many LGPS funds are starting to turn cashflow negative is unlikely to be attractive, as the ad hoc nature of reviews could lead to disinvestment in an unplanned way, potentially damaging the fund’s investment strategy.
• Agreeing to reviews could lead to less stable contribution rates, with contribution rates much more tied to investment performance and the movement in interest rates and inflation. With cuts in interest rates expected in the coming months, liabilities might well rise again.

The Scheme Advisory Board (SAB), which encourages best practice in the LGPS has urged LGPS funds to be cautious, urging the importance of stable contribution rates. The SAB has said that reduced contribution rates might be appropriate where a critical mass of employers are looking to de-risk investments by moving to long-dated fixed income assets. The SAB’s own guidance also says that: ‘changes in funding values due to market movements are not of themselves sufficient to trigger a review and are best managed through the triennial valuation process.’ This is only guidance and goes beyond both what the regulations and the Government’s own guidance says. However, we anticipate that this will dampen any appetite for interim reviews by LGPS funds.

The Government’s prompting for the LGPS to invest in private equity and levelling up schemes, means that it seems unlikely that a reduction in contribution rates will receive any encouragement from government.

All in all, whilst interim reviews of contribution rates are a potential option, we consider it unlikely that LGPS funds will exercise their discretion to facilitate such reviews. Local authority finance officers may be better searching around down the back of the sofa than waiting for LGPS contribution rate reviews to ride to the rescue.