LGPS Current Issues | March 2025
Funding matters
2025 actuarial valuations – preparations continue
The 31 March 2025 valuation date for Funds in England and Wales is fast approaching and preparations are already underway in a number of areas – data cleansing / demographic assumption studies, employer engagement, review of FSS and associated policies etc.
We focus here on a few key areas...
Hitting the headlines
It seems talking about the LGPS (and pensions generally) has never been so popular and the issue of employer contributions has hit the headlines in many articles over the past few months.
There seems to be a constant discussion in the mainstream media on funding levels, surplus, employer contributions, and funding strategy policies in particular. Given the wider focus on the sector currently with the “Fit for the Future” consultation and forthcoming reform, set against the backdrop of budgetary constraints for local authorities, the external scrutiny on the 2025 actuarial valuation exercise is only likely to increase further and it will be critical that messages around affordability and sustainability are considered carefully and ultimately developed into a coherent policy on setting employer contributions.
For many Funds, a “one size” approach won’t be appropriate for all employers in a Fund and the strategies adopted by different Funds will vary due to the underlying objectives and circumstance of each Fund. Given the additional scrutiny expected, it becomes crucial therefore that Funds adopt funding strategies and associated policies that are clear and transparent, robust to challenge, have direct links to the underlying investment strategy, and are understood by all stakeholders in order that informed decisions can be taken during the valuation process.
The new Funding Strategy Statement guidance (as referred to below) provides the framework to support Funds in this process. In addition, linked to policy setting and application, on 10 March 2025, MHCLG wrote a letter to administering authorities in relation to inter-valuation contribution rate reviews confirming that the Government intends to consult on changes to clarify the policy intent in this area. We will provide further comment on this in due course once details of the consultation are known.
Funding Strategy Statement updated guidance
The main development since our last edition has been the publication of updated guidance for preparing and maintaining a Funding Strategy Statement (FSS) by the Scheme Advisory Board (SAB) on 15 January 2025. The updated guidance can be found here. The previous guidance was published by CIPFA back in 2016 and a lot has certainly changed since then!
The new guidance will need to be considered by all LGPS Funds in England and Wales who will need to review their FSS this year as part of the 2025 actuarial valuation. Alongside a number of key changes to encourage best practice, the guidance now also references climate change.
Funds were encouraged to undertake analysis showing the impact on funding levels under different plausible climate scenarios for the first time as part of the 2022 actuarial valuation and the updated FSS guidance now formalises this requirement. SAB has also published on its website the updated “key principles document” for undertaking such analysis for the 2025 valuations (collaboratively prepared by the actuarial firms) and this can be found here.
We see the following as key areas of focus for Funds in relation to the new guidance:
Review and General Structure
Whilst the new guidance will reflect what many Funds are already doing in practice, for all the FSS will need to be reviewed to ensure policies are clearly documented and the general structure of the guidance is followed – ensuring consistency between Funds.
Emerging Issues
For emerging areas such as partial termination / surplus management, Funds will need to consider and/or develop and clearly document their policy to ensure it’s robust, transparent, and stands up to scrutiny in the current environment.
Employer Risk
Employer risk is a crucial pillar to the funding strategy and covenant assessment/monitoring underpins this. The new guidance gives increased focus to employer covenant and this will be even more important when developing a surplus policy.
Please see our recent briefing note, which sets out further details of this and how we can help Funds monitor and assess employer covenant in a cost effective way.
Climate Change
For the first time, the FSS guidance acknowledges climate risk as a key systemic risk for long-term pension funding and we welcome this. It is vital that all Funds consider this risk in an integrated way, as part of developing their funding strategy and gain a greater insight into how climate change is built into the actuarial assumptions and risk management plan.
Employer engagement and consultation
A key part of any review of the FSS will be the consultation with employers and other key stakeholders, which will involve the communication of how Fund policies have been set and what this means for contribution outcomes and their participation in the Fund. The guidance sets out key consultation principles for Funds to consider alongside the process to follow after the consultation is completed.
Funds will need to ensure their FSS for the 2025 valuation (and associated policies) are not only compliant with the new guidance and regulatory requirements but are also robust and, to link back to the ongoing consultation, are “Fit for the Future”.
Please contact your usual Mercer consultant if you’d like to discuss further how your FSS needs to evolve.
Impact of Local Government reorganisation
Following the publication of the English Devolution White Paper by the government on 16 December 2024, the government wrote to all councils in remaining two-tier areas and neighbouring small unitaries for a joint programme of devolution and local government reorganisation.
To recap, devolution is the transfer of powers and funding from central to local government and reorganisation is about how local government powers and funding are organised between local authorities.
Some local elections scheduled in May 2025, in those areas potentially impacted, have already been postponed.
Following the above, in February 2025 Devolution Priority Programme consultations have been launched in six areas where mayoral combined (county) authorities are proposed to be established, namely Cumbria, Cheshire and Warrington, Norfolk and Suffolk, Greater Essex, Sussex and Brighton, and Hampshire and the Solent. The consultations close on 13 April. A follow-up letter in relation to local government reorganisation was also issued to local authorities in two-tier areas.
Local government reorganisation isn’t a new thing and there have been a number of examples of this over the years. From a funding perspective, there aren’t necessarily any major issues to consider here as we would not expect reorganisation to have a significant impact on the overall contributions payable to a Fund. However, in practice, and from our experience of such events, additional calculations may need to be carried out as part of the valuation process once the direction of travel in relation to reorganisation is known e.g. where employers are being separated / combined, assessments will need to be carried out to assess the level of funding deficit / surplus that needs to allocated. There may also be knock-on implications for how academy conversions are treated going forwards that need to be considered. It’s important therefore to have the right policies in place for inter-valuation contribution rate reviews, academy conversions, and to ensure rates and adjustments certificates have the necessary wording in.
From a governance perspective, depending on the impact of reorganisation on the administering authority and also the pension committee/board (which can be no impact of course), considerations around decision makers / governance structures / training all come to the fore and will need to be factored into any project plans being developed so the right level of support can be provided.
Similar issues to those set out above will need to be considered for Funds potentially impacted by the Devolution proposals too. At a time when reform is already taking place in the LGPS, the impact of further change within local authority structures is likely to place further demand on senior officers and should not be underestimated.
Whilst funding implications are likely to be considered further as part of the actuarial valuation, given there may be other implications that need to be considered around governance / staff transfers / and wider transformation across the authorities involved, we have specialist colleagues across Mercer and Oliver Wyman that can support Funds and authorities in these areas directly. Please contact your usual Mercer consultant if you’d like further details of this support.
Other funding news in brief
Gender Pension Gap reporting
Discussions are underway between SAB and the actuarial firms (to coincide with the forthcoming MHCLG consultation that is expected) to agree what information could be reported as part of the 2025 actuarial valuation. Such reporting is expected to be on a consistent basis across all Funds.