Setting employer contribution rates
Assets
We use three income sources to pay pension benefits:
- Member contributions: These are set nationally and only change when the Scheme Advisory Board (SAB) evaluates LGPS costs. To find out more, visit the SAB website.
- Employer contributions: These fill the gap between the value of your liabilities and the combined value of member contributions and investment returns. If the gap is large, employer contributions must increase; if smaller, employers pay less.
- Investment returns: These come from investing both member and employer contributions. However, because investment values fluctuate daily, there’s inherent risk. To manage this, the actuary assesses the expected value of investment returns.
Contribution strategy
When determining contribution rates at each valuation, we focus on:
- your funding target – the estimated amount needed to pay pension benefits.
- your funding target date, (or ‘time horizon‘) – the number of years left to reach the target.
- confidence of success – the probability of meeting the funding goal.
Funding target
To set employer contribution rates, we estimate the amount needed to pay pension benefits (value of liabilities). We call this the ‘funding target’.
Since the LGPS is a defined benefit scheme set by regulations, we work out members pensions based on:
- a percentage of their pensionable pay
- the years they contribute to the LGPS.
The benefits are inflation-protected and increase with the cost of living.
However, several uncertain factors affect the total value of liabilities, including:
- future changes to members’ pensionable pay
- how long a member pays into the LGPS
- the lifespan of members and any dependants after retirement
- future changes to the cost of living.
To manage these uncertainties, the actuary makes assumptions about these factors to determine the money needed to pay the pension benefits. We review these assumptions and actual experience every three years as part of the valuation process.
Funding target date / time horizon
The funding target date is the deadline for ensuring your liabilities are fully covered by your assets. It represents the number of years until the employer reaches this goal, called the ‘time horizon‘ (e.g., 1, 5, 15, or 20 years).
For most employers, the funding target date aligns with when they stop employing LGPS members. This could be either because their admission ends or their last active member leaves. However, employers like local authorities and schools that always employ LGPS members, we use a rolling 20-year time horizon.
Confidence / probability of success
To tackle uncertainty in funding targets and time horizons, we use a risk-based approach to set contribution rates. This keeps the Fund stable while making employer contributions sustainable.
The probability of success considers your employer type and the risk level posed to the Fund. Contribution rates are set based on:
- your funding target.
- your target date.
- confidence in the strategy’s effectiveness.
The actuary calculates how much of the funding target will be covered by member contributions and investment returns. Your contribution rate covers the shortfall.
What should I do as a scheme employer?
- Provide accurate data: The valuation depends on the quality of member data you give us. Inaccurate data may lead to your rates being set too high or too low.
- Update contacts: We provide updates to employers throughout the year. So, it’s vital that our contacts for you are up to date. Use the ‘Contacts request form’ for any changes.
What should I do once I get my results?
- Review the results schedule to understand your funding position and next April’s contribution rates.
- Read the Funding Strategy Statement to see how the Fund’s approach applies to you. You can find the latest reports on the funds and investment policies section of each Fund’s key documents page.
- Get in touch by the 31 January if you want to discuss your results. Any discussions about your rates must take place before the end of the consultation period.
