Is LGPS a Funded Scheme? Everything You Need to Know About the Local Government Pension Scheme

The Simple Answer: Yes, LGPS is Definitely a Funded Scheme!

If you’ve been wondering whether the Local Government Pension Scheme (LGPS) is a funded scheme I can give you a straightforward answer – YES, it absolutely is. But what does this actually mean for you as a member or potential member? Let’s dive into the details and break down what makes LGPS a funded scheme and why it matters.

As someone who’s spent years researching pension schemes, I’m excited to share this comprehensive guide that will help you understand how LGPS works how it’s funded and what benefits it offers.

What Makes LGPS a Funded Scheme?

The LGPS is one of the largest pension schemes in the UK, and its funding structure is what makes it unique. Unlike some other public sector pension schemes that operate on a “pay-as-you-go” basis, LGPS is a fully funded scheme.

But what does “funded” really mean? Well, in simple terms:

A funded pension scheme is one that builds up a pot of money (assets) over time to meet future pension payments (liabilities). The scheme aims to have enough assets to cover the cost of the benefits that members will receive when they retire.

The LGPS is funded at both local and employer levels. This means that the scheme actively works to achieve solvency by holding assets to cover the cost of future benefits or liabilities.

How is LGPS Funded? The Three Key Sources

The LGPS has three main sources of funding to pay member benefits:

1. Employee Contributions: Members pay a set percentage of their salary ranging from 5.5% to 12.5%, as set out in LGPS regulations.

2. Returns on Investments: The managing authority chooses which short-, medium-, and long-term investments each fund makes to earn returns. You can usually find these investment details on the website of each fund in their Investment Strategy Statement.

3. Employer Contributions: Employers (like academy trusts, local authorities, etc. ) set contribution rates based on planned and known income or expenses Every three years, during the triennial valuation, these rates are looked at again.

As a member, you contribute roughly one quarter of the Scheme’s costs, while your employer pays the remaining three quarters. That’s a pretty good deal when you think about it!

The Triennial Valuation Process – How Funding Levels Are Assessed

An outside actuary figures out how much your employer should put into the Scheme every three years. This is called the triennial valuation, and it’s an important part of keeping the LGPS financially stable.

During this valuation, the actuary:

• Reviews the assets and liabilities of the fund
• Takes investment returns into account
• Assesses the fund’s membership profile
• Determines appropriate employer contribution rates

The most recent triennial valuation was completed on March 31, 2022, which set employer contributions from April 1, 2023, to March 31, 2026.

Here’s a typical triennial valuation cycle:

• April 1, 2023: New employer contribution rates begin
• September 1, 2024: Pre-scheme valuation planning starts
• 2025: Scheme valuation process takes place
• April 1, 2026: New employer contribution rates begin

Employer Contribution Rates – How They’re Calculated

Employer contribution rates in LGPS are split into two components:

1. First Rate: This rate covers the cost of future benefits that active members (current employees) will get. It’s usually expressed as a percentage of pay.

2. Secondary Rate: This adjusts the primary rate to arrive at the overall rate employers must pay. It may cover costs associated with funding benefits earned up to the valuation date and other factors. It can be expressed as a lump sum or as a percentage of payroll.

Several factors affect employer contribution rates, including:

• Predictions of future inflation, pay increases, and longevity
• The profile of the employer’s membership
• The employer’s current funding position
• Expected investment returns
• Prudence margins in the funding strategy
• Staffing changes (growth or reduction)
• Accuracy of member records

Local Administration with National Framework

One interesting aspect of LGPS is that while it’s a national public sector pension scheme, it’s managed locally by more than 80 administering authorities (funds) in England and Wales.

Each fund is autonomous and managed by an administering authority, which ensures there’s sufficient income to meet current and future financial obligations. The funds operate according to LGPS regulations owned by the Ministry of Housing, Communities and Local Government.

Your specific LGPS fund is determined by your geographical location. For example, if you work for an academy trust with schools in different areas, you might have LGPS arrangements with multiple funds.

LGPS Funding Strategy Statement – The Blueprint for Financial Health

Each LGPS fund publishes a Funding Strategy Statement (FSS) that outlines how employer contribution rates are set. These statements follow guidance from the Chartered Institute of Public Finance and Accountancy (CIPFA).

The FSS is super important for understanding how your pension fund operates. It details:

• How employer contribution rates are calculated
• The fund’s approach to achieving solvency
• Policies for managing deficits or surpluses
• Approaches to pooling (if applicable)

If you’re an academy trust or other employer in the scheme, you should definitely review the FSS of any pension fund you participate in!

The DfE Academy LGPS Guarantee – Extra Security for Academy Trusts

For those working in academies, there’s an additional layer of security. The Department for Education (DfE) provides a crown Guarantee which ensures that all outstanding LGPS costs are paid to pension funds if an academy trust closes.

This Guarantee was introduced in July 2013 to assure LGPS pension fund managers that academies aren’t “high-risk” employers. The DfE expects LGPS funds to recognize the strength of this Guarantee and treat academies equitably with local authority-maintained schools when setting contribution rates.

Funding Position – Surplus or Deficit?

Individual LGPS funds may be in a funding surplus or deficit depending on multiple factors. Triennial valuation reports and the pension fund annual reports can be found on the Scheme Advisory Board website if you’re curious about the current health of your fund.

If your fund is in deficit, the Funding Strategy Statement will outline the number of years required for the fund to return to balance. For funds in surplus, employer contributions might be reduced.

Cost Management Process – Ensuring Long-term Sustainability

The LGPS has a cost management process to ensure its long-term sustainability. This process monitors the cost of the Scheme to make sure it stays within limits agreed by the Scheme Advisory Board and HM Treasury.

If the cost of the LGPS becomes higher or lower than those limits, changes to the Scheme design may be required. This helps keep the scheme affordable and sustainable for both members and employers.

LGPS vs Other Public Sector Pension Schemes

It’s worth noting that the LGPS differs from some other public sector pension schemes like the Teachers’ Pension Scheme (TPS). While both are defined benefit schemes (meaning your pension is based on your salary and service rather than investment performance), the LGPS is funded, whereas some others operate on a pay-as-you-go basis.

In the academy sector, teachers are entitled to be members of the TPS, while all other staff are legally entitled to be members of LGPS. Academy trusts must offer access to the LGPS to all non-teaching employees.

Pooling – Sharing Risk and Reducing Administration

There are mechanisms available to multi-academy trusts to combine either within the trust itself or more widely to manage risk and reduce administration:

Employer Pooling: An LGPS pension fund may allow a multi-academy trust to combine all constituent academies located within that fund into a single employer pool. This has the administrative benefit of a single employer contribution rate and allows academies within the same trust and fund to share risk.

Asset Pooling: Pension funds must pool their assets with other funds within the LGPS. This may enable funds to benefit from higher investment returns and lower investment management fees.

What This Means for You as a Member

As an LGPS member, understanding that it’s a funded scheme should give you confidence in the security of your pension. Here’s why:

1. Security: The scheme actively works to maintain sufficient assets to pay benefits
2. Transparency: Regular valuations provide clarity on the scheme’s financial health
3. Sustainability: The cost management process helps ensure long-term viability
4. Shared responsibility: Both you and your employer contribute to your pension
5. Investment strategy: Your pension fund has a clearly defined approach to investment

Final Thoughts – Is LGPS Being a Funded Scheme Good News?

Absolutely! The funded nature of LGPS is a significant advantage. It means that unlike some other pension schemes, LGPS is building up a dedicated pot of money to pay your future benefits, rather than relying solely on future contributions.

While no pension scheme is perfect (and the funding levels can fluctuate), the LGPS has robust mechanisms in place to ensure its long-term sustainability. The regular triennial valuations, clear funding strategies, and cost management processes all contribute to the scheme’s financial health.

So, if you’re a member of LGPS or considering joining, you can feel confident that it’s a well-structured, funded pension scheme designed to provide security in retirement.

Have you had any experiences with LGPS that you’d like to share? I’d love to hear your thoughts in the comments below!

Frequently Asked Questions About LGPS Funding

Q: Can I opt out of the LGPS?
A: Yes, employees can opt out of LGPS. However, even if you opt out, you retain the right to re-join at any time while employed by an eligible employer. Note that you’ll be automatically re-enrolled every 3 years under auto-enrollment regulations.

Q: What happens to my pension if I leave my employer?
A: If you leave your employer but don’t transfer your pension, you become a deferred member. Your pension benefits are protected and will be paid when you reach retirement age.

Q: How can I find out more about my local LGPS fund?
A: You can contact your fund directly. Contact details for your fund can be found on the LGPS website.

Q: What is the 50/50 scheme?
A: The 50/50 scheme allows you to pay half your normal contribution rate and build up half your normal pension. This might be a good option if you’re temporarily struggling financially but don’t want to opt out completely.

Q: How does being a funded scheme affect my pension benefits?
A: The funded nature of the scheme doesn’t directly affect the level of benefits you receive (which are defined by the scheme rules), but it does provide security that the money will be there when you need it.

Remember, pensions can be complex, and it’s always best to speak with your pension fund or a financial advisor if you have specific questions about your situation.