2025 and beyond: The impact of LGR on LGPS valuations

Following the publication of the Government’s white paper on 16 December 2024, local government reorganisation (LGR) is proposed for two-tier areas and potentially some existing unitary councils.

Devolution proposals include new powers and responsibilities for mayors, including responsibility for Police and Crime Commissioners (PCC), the Fire and Rescue Authority service, and the establishment of new mayoral strategic authorities. 

In this blog, we explore the potential impact of reorganisation on the 2025 valuations, in terms of funding approach and contribution setting. Should we still set contribution rates for the authorities, even if we know they won’t exist at the time of the next valuation? There are of course other wider governance and structural implications of devolution and LGR on LGPS funds, which we will explore further in due course.

What does the white paper cover?

The Government’s white paper proposes: 

• decentralising power and fostering local growth across England, with new powers and budgets for Mayors;
• reconfiguring national agencies; and 
• facilitating local government reorganisation. 

LGR is aimed at areas where there are two tiers of local authority – smaller district and larger county councils – creating new unitary councils with a population of 500,000 or more. The goal is to “achieve efficiencies, improve capacity and withstand financial shocks”, as stated by the Government. 

As ever, when there are potential changes to scheme employers, the proposals will present some challenges for the 2025 valuation in how the Fund Actuary sets the contribution rates. 

Contribution rate implications

If existing councils are abolished and replaced by new unitary council(s), there are a number of approaches which could be considered when setting contribution rates as part of the 2025 valuation, including:

• Calculating a harmonised contribution rate from 1 April 2026, based on the employers that will form the unitary council(s). It would then need to be decided whether to report separate funding levels. If the direction of travel is to have a single employer, then we could instead calculate a total or pooled funding level.
• Agreeing on a target harmonised contribution rate, where initial contribution rates are based on the individual funding positions, then gradually adjusted (‘stepped’) to align with the agreed harmonised contribution rate from the date of the unitary, once known. 
• Continuing to treat them separately and base their contributions on their individual funding levels, then do a contribution review using the employer flexibilities when more is known.

As the Fund Actuary, we can be relatively flexible in terms of the calculations, and can build in options if it’s likely that more information will be available later in the valuation timetable (and before 31 March 2026). Of course, any changes to rates will need to be flagged in advance to the affected employers for budgeting purposes. 

Engaging with employers

Employer engagement is key to better understand what is being proposed and the potential timing. In county areas, one of the key employers involved in LGR is the administering authority. The Head of Pensions should therefore engage with colleagues elsewhere in the council to ensure that the pension fund implications are not forgotten.  

Discussions should include district councils too where appropriate. Members of the Pensions Committee should also be encouraged to emphasise the importance of including pension fund representatives in discussions. 

Early engagement should start as soon as possible and before contributions are calculated to avoid unnecessary changes and additional work. This would help to agree a contribution plan that works for them (and the LGPS fund) with this significant change. 

How we can help

We are very happy to attend meetings with the affected employers to discuss contribution rates and the valuation more generally. We can also provide illustrative numbers of funding levels and contributions levels based on individual and/or merged positions for affected employers. 

Depending on timing and other pressures, this could be done at any time in the valuation cycle. There may be benefits to waiting until more is known about the plans for the reorganisation but equally, employers will want to have a good idea of contribution rates for budgeting purposes. 

Funding implications

There are also a number of other funding implications to consider, including:

Legacy liabilities for former councils/employers

What will happen to these? Will they be kept on separate employer codes? Will there be a need to continue to track these separately in the future? Are any existing employers being split between two or more new councils?

New academies

Should the LGPS fund review the approach where schools convert, following a new unitary authority being established? Are there going to be any boundary changes which might affect which fund a new academy participates in?

New contractors

We are reviewing the approach to new contractors and have discussed and agreed to use pass-through as a default for a number of funds. If the scheme employer changes, what should the pass-through rate be for the new contractor? 

Historic contractors 

Where they are linked to a particular council or a guarantee is in place, do they need their rates/guarantees to be reviewed? Will admission agreements need to be reviewed? And rather than simply novate the admission agreement for the change in scheme employer, will it be possible to renegotiate the pensions elements of the contract to take account of New Fair Deal? Will timing permit this?

Unfunded liabilities 

Will there be an opportunity to crystalise these and convert them to funded liabilities? It’s on our wish list of regulatory changes, and does seem to have relevance where LGR is being considered (although it would also have benefits for all funds and employers paying Compensatory Added Years).

Cross fund activity 

If employers merge across funds, there will be even further complications around where the members will belong i.e. which fund and which employer. As ever, it would save time and cost if there were fixed bulk transfer terms in these situations. We’re not clear if Directions would be needed or used to transfer deferred and pensioner members. 

Exit credits 

We recognise the possibility that the usual regulatory changes, which specify no exit valuations when existing local authorities cease, may not be made – allowing surplus funds to be returned to the outgoing councils. 

This isn’t necessarily a terrible idea, depending on the membership profile and funding position of the council. However, there are material risks - particularly regarding investment risks for potentially material orphan liabilities - that need careful consideration.

As this is a significant change, there may also be other knock-on effects such as an increase in leavers (deferred members) due to redundancies and the number of ceasing employers. 

Get in touch

We are already undertaking a lot of activity preparing for the 2025 valuation and are happy to discuss any issues or concerns that you may have. Please get in touch with your BW contact for more information.