LGPS Current Issues | June 2025
Funding matters
2025 actuarial valuations – preliminary discussions underway
The world is very different than at 2022. In particular, we have seen double digit inflation, a major surge in interest rates and significant investment market volatility – all of which affect funding positions. This of course does not end at the valuation date – volatility continues, as seen in early April when the US announced its new tariffs. Funds and their advisors will need to consider whether and how these are factored into funding strategies / contribution outcomes.
Now that the valuation date has passed, work continues at pace across all areas of the integrated risk management framework.
Whilst it’s too early to provide any definitive comment on the outcomes that may emerge from the valuation (membership data likely to start being provided in June/July for many Funds), it is likely many employer funding levels will have improved since the last valuation, the extent to which will vary from employer to employer. This has largely been driven by higher expectations of future returns on asset portfolios driven by the increase in interest rates, as well as the slow-down in life expectancy improvements relative to 2022 assumptions. To the extent that employers see improved funding levels, this may lead to the potential for lower contribution rates for employers from 1 April 2026.
However, the LGPS is inherently a long-term funding consideration. Knee-jerk (over)reactions to improved funding positions are wise to be avoided, just as the they were when funding levels deteriorated in the past. The Fund and its stakeholders are required to balance multi-faceted objectives including:
- cost affordability and contribution stability for employers,
- Fund solvency and long-term cost efficiency, and
- inter-generational fairness for current and future members.
As we have highlighted above, the time horizon of the LGPS is long…and extends far beyond that of most private sector defined benefit schemes, which are approaching “end game” management having closed many years ago. Consequently, the LGPS is more exposed than others to long-term funding risks – sustained levels of high inflation, low economic growth, muted investment returns and of course the potential impacts of climate change.
As part the 2025 valuation, we will factor in specific projection modelling to address these objectives, so that any potential contribution reductions can be assessed for their sustainability across valuation cycles and generations. We have developed our Lambda Tool specifically for this purpose. Lambda uses stochastic modelling for a given contribution plan to analyse at future dates:
- The chance that contribution increases are needed
- The range of potential increases
- The impact on funding level / surplus
This lets Funds assess their contribution plan in the context of sustainability and the potential impact on employer budgets and future generations.
In relation to investment and covenant aspects of the risk management framework, please refer to comment in the investment section around establishing an investment reserve and investment strategy reviews, and also refer to our recent briefing note which sets out more details on the management of employer risk and what how we can support Funds with monitoring/assessing covenant in an effective and efficient manner.
Underpinning all of the above is preparatory work relating to valuation governance e.g. data quality (member and employer), employer engagement, stakeholder training etc, in particular where there have been changes to committee/board members recently e.g. post the May elections, and of course ensuring the Fund has sufficient, and robust, funding policies in places that will form part of its overall Funding Strategy Statement (which will need to reflect the new guidance issued in January – see further comment from our March edition here).
If you’d like to discuss any aspect of the 2025 valuation and/or potential use of the Lambda tool in scenario analyses, please contact your usual Mercer consultant.
2025 Actuarial Valuation – Board Statement
Following on from the previous surplus statement and Funding Strategy Statement (FSS) guidance issued by the Scheme Advisory Board, the Board issued a further statement on 28 May 2025 to provide guidance to administering authorities in relation to the 2025 actuarial valuations, with the aims of:
- assisting AAs and fund actuaries to manage the valuation process
- balancing the expectations that different stakeholders will have
- improving consistency of the risks considered in setting funding strategies
- increasing the transparency of decision making and how this affects outcomes.
We provided input to the preparation of the statement and welcome the comments made by the Board. We look forward to discussing valuation outcomes further with Funds and employers over the coming months.
Terminations – the Goldilocks test
With termination surpluses increasingly common, can the insurance market provide a useful reference when funds set their termination approach. Please see our recent article which provides comment on how funds should be looking to approach terminations going forward and ensure they have a robust policy that manages both risk and costs and also balances the needs of different employers.
Fairness and Access consultation
On 15 May 2025, the Government launched its “Access and Fairness” consultation for the LGPS in England and Wales. The consultation closes on 7 August 2025. The consultation was accompanied by a Written Ministerial Statement and draft amendments to the Regulations. We set out below some initial thoughts on the consultation as we begin to consider our response.
The consultation includes a number of proposals (covered by 52 questions) designed to improve fairness and access to the LGPS across the following areas:
- Survivor pensions and death grants (13 questions)
- Addressing the Gender Pension Gap in the LGPS (11 questions)
- Collecting data on opt-outs (6 questions)
- Changes to forfeiture regulations (5 questions)
- Technical changes to how the McCloud remedy is implemented (5 questions)
- Other miscellaneous changes to regulations and benefits (including 5-year refunds, pre-2014 AVCs and small pot payments) (7 questions)
A further 5 questions covered the impact on administration and the Public Sector Equality Duty.
Many of the proposals in the consultation were expected. Indeed, a number of the proposals have been discussed for a long-time (in particular those around survivor pensions, death grants, 5-year refunds). We comment below on how different stakeholders are likely to be impacted.
Overall, given the number of changes being proposed, the technical nature of these, and the wide range of areas impacted, stakeholder communication will be key going forwards, as will central support and guidance to ensure consistency of implementation across all Funds.
A second consultation is also expected later in the year on further issues of fairness, equality, integrity and efficacy in funds, emphasising the importance the Government is placing on these issues.
We hope the above is helpful – should you wish to discuss the consultation further in terms of your own response and the potential impact it may have on the Fund then let us know.
Financial Education – an introduction to Mercer’s Women and Wealth team
Alongside colleagues from Mercer’s Private Wealth team, we are currently in the process of developing a financial education offering for employers who participate in the LGPS, primarily local authorities, and further details will be provided of this in due course. Given active memberships are predominantly female, and given the focus on the Gender Pension Gap as referred to above, and other similar areas, Mercer’s Women and Wealth team will be an integral part of the services we will provide. An overview of the Women and Wealth team can be found here.
Other funding news in brief
Virgin Media - latest
On 5 June 2025, the Government issued a press release announcing its intention to introduce legislation in response to the ‘section 37’ matters arising from the Virgin Media legal decision. The press release notes that the legislation will “give affected schemes the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards.”
The Government’s stated intention to provide for a form of retrospective actuarial certification is helpful and we are pleased to see that the Government has listened to the pensions industry and is proposing to take steps to allow funds to deal with the challenges arising from Virgin Media. We’ll need to understand how the legislation will work in the context of the LGPS before being able to provide further comment on this.
CMI 2024
The Continuous Mortality Investigation (CMI) has provided an update on expected timings for CMI_2024, it’s latest Mortality Projections Model. They now expect to release this in the final week of June. This will be taken into account as part of the analyses underway (where we are Fund Actuary) to determine the relevant life expectancy assumptions to be adopted for the 2025 actuarial valuation.