Recent news in the media indicates that the investment committee of Kensington and Chelsea London Borough Council has voted in favour of stopping employer contributions to its Local Government Pension Scheme (LGPS) fund for the 2025/26 financial year (which starts on 1 April). Reports also state that, controversially, this decision was made without the approval of the fund’s actuary.
Typically, any extra money in LGPS funds is managed by gradually reducing contributions or using it to offset contributions, rather than stopping them completely. It seems that Kensington and Chelsea’s investment committee defended this unusual decision, which was made outside the regular valuation period, by pointing to the fund’s strong financial position. At the last valuation, the fund was 207% funded, well above the current LGPS aggregate fund level of 107%.
However, we understand that the fund’s actuary, Hymans Robertson, declined to approve the decision, saying it ignored the need for long-term affordability and stability in LGPS funding strategies. The actuary raised concerns that reducing employer contributions from 7.5% to 0% outside the regular valuation period might cause problems in budgeting and create the false impression that zero contributions could be maintained in the future. They also warned of potential legal action from the Ministry of Housing, Communities and Local Government and the Pensions Regulator.
Kensington and Chelsea has further stated that the £9 million saved by cutting contributions will be redirected to the local authority's Grenfell Reserve fund, which is set aside for settling claims with victims and their families, as well as any future costs related to the Grenfell Tower fire.
This decision (which as stated above may yet be formally challenged) raises concerns for other LGPS funds, especially those in local authorities facing budget deficits due to increased service demands, inflation, and cuts in government funding. With local authorities under financial pressure, there may be a growing temptation to use pension fund surpluses as a quick fix. However, this could harm the long-term stability of LGPS funds and create problems for future contributions. Therefore, as ever, this is a complex issue that needs to be considered carefully and should in our view not create a precedent for other councils to follow.
It is worth noting that Kensington and Chelsea's proposal comes shortly after the government announced plans to relax restrictions on how “well-funded occupational defined benefit pension funds that are performing well” can invest surplus funds. It will be interesting to see how, if at all, the government reacts to Kensington and Chelsea's proposal in light of that announcement.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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