The Government Actuary’s Department (GAD) has published its latest report on the financial health of the Local Government Pension Scheme (LGPS) Scotland, based on the 2023 actuarial valuations. This triennial review, conducted under Section 13 of the Public Service Pensions Act 2013, provides a comprehensive evaluation of the scheme’s financial position and examines its performance against four key aims: compliance, consistency, solvency and long-term cost efficiency.
Snapshot of LGPS Scotland’s Financial Health:
- All 12 constituent funds were in surplus as of March 2023.
- Total assets have grown from £46 billion in 2020 to £60 billion in 2023.
- The aggregate funding level has improved significantly, from 104% in 2020 to 141% in 2023.
This marks a notable shift from the previous valuations in 2020, where four funds were in deficit, highlighting a significant improvement in overall scheme health. The turnaround reflects strong investment performance and funding strategies across the LGPS in Scotland. As a result, the scheme now holds more assets than expected to be needed to meet its liabilities under current assumptions.
Key insights
The report offers a valuable insight for clients, who are participating employers in the Local Government Pension Scheme, as to funding trends, scheme governance and emerging risks across all the funds. Although employers in the LGPS in Scotland should welcome the schemes strong funding position, GAD advises caution. The current surpluses may ease short-term funding pressures, but it is important to view this in the context of considerable uncertainties regarding future pension costs.
No pressing solvency concerns were identified however the report highlights that, in the context of competing pressures on employer budgets and taking into account the sensitivity of funding levels given fluctuating market conditions, risks are important to consider. Employers should continue working closely with actuaries to understand how surplus management affects contribution rates and long-term liabilities.
The report also highlights that similar funds can reach different conclusions about their financial strength. This reflects the flexibility built into the valuation framework by the decentralised model, including how funds balance factors such as prudence and stability but results in added complexity to understanding and comparing funds’ positions.
Given the healthy funding position of the funds, no flags were raised in relation to long term cost efficiency. The importance of remaining conscious of risks associated with potential future changes to the scheme’s funding position was noted. Employers should continue to assess whether their contributions are fair and sustainable and ensure they are not exposed to unexpected risks. Clear communication and active engagement with fund administrators are key to navigating these issues effectively.
Whilst the report does not raise concerns about how pension funds manage their surpluses, it does highlight a wide variation in approaches adopted across the board, with GAD finding limited disclosure around the rationale for surplus utilisation resulting in notable differences in contribution rates. The report observes that the underlying reasoning behind such variations is often unclear and suggests that there would be a benefit from further disclosure of decision-making rationales, and stronger governance and transparency in how funds manage their surpluses, particularly in light of growing concerns around intergenerational fairness, specifically the balance between the interests of current and future taxpayers and employers.
Recommendations
In light of it’s findings GAD has recommended that Scottish Ministers, through the Scottish Public Pensions Agency:
- continue stakeholder engagement, to assess how greater consistency could be achieved to allow easier comparison between funds and better understanding of risks.
- consider whether additional guidance on surplus usage is required to support funds in balancing the different surplus considerations when setting contribution rates, and enhancing the transparency and documentation of decisions relating to surplus usage, in particular on the balance between solvency and intergenerational fairness; and
- monitor emerging issues and review climate analysis ahead of 2026 valuations.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pension team or your usual Brodies contact.
