Funding levels for the LGPS have hit a new record in June with the scheme now enjoying a £45bn surplus, according to the latest estimates.
The LGPS is benefiting from a combination of tailwinds including lower inflation and improved asset values, bringing aggregate funding levels to 112% according to Isio’s low risk funding index.
The improvement is primarily due to an increase in equity valuations in asset values and small reductions to future inflation expectations, Isio said. Of the 87 participating funds, 69 have funding levels of 100% or higher, with levels ranging from 71% to 169% funded.
The positive momentum for the LGPS could spark renewed challenges among policy makers for more LPGS capital to be deployed in UK growth assets.
Earlier this month, the Pensions Insurance Corporation (PIC) published a report calling for a Canadian style reform of the LGPS. The insurer argued that if the LGPS were to be merged into a single fund comparable to the Canada Pension Plan Investment Board (‘CPPIB’), which has a similar size to the entire LGPS, this could “unlock” some £40bn of additional investment in infrastructure.
However, the report has been criticised by Richard Tomlinson, CIO of the LPPI pool who pointed out that the scheme has on average already 6% invested in infrastructure. “If the LGPS “goes Canadian” the marginal investment in Infra equity could be circa. £16bn” he said, adding that PIC’s calculations also had not acknowledged the impact of leverage in infrastructure investments.
Another potential headwind for further UK private market allocations could also be the positive funding ratios themselves as funds might now have less appetite for growth assets.
Isio, the consultancy that conducted the Low-Risk Funding Index research used the positive figures as an opportunity to renew its call to reduce employer contributions.
“With LGPS assets across England and Wales currently estimated to be in excess of £400bn, the attractiveness of the LGPS to the new chancellor is obvious” said Steve Simkins, partner and public services leader at Isio.
“Instead of focussing on the assets in isolation, more attention could be given to the surplus within the LGPS and how this can be used more directly to influence the UK economy.
“For local authorities, surplus could be used to reduce current contributions and support essential services provided to local communities. A very small reduction in assets will make a very big short-term difference for local authorities. This could create the best long-term returns for the local government” he stressed.
But the Bank of England’s rate cut from 5.25% to 5% announced earlier this month could bring an end to this spell of good news for the LGPS with a potential drop in base rates combined with a relatively steady political outlook leading to a potential fall in bond yields. This in turn could push up the relative value of LGPS liabilities with negative effects for overall funding levels.
