Contribution
My Lords, this group of amendments is the first of three groups that together seek to ensure that the Local Government Pension Scheme operates more effectively and proportionately, protecting member benefits, supporting long-term sustainability and remaining affordable for employers.
The context is critical. The financial position of the scheme has changed profoundly. On a low-risk basis, the LGPS was around 126% funded in March 2025, rising to around 147% by September, with surpluses of £87 billion and £147 billion respectively. This is a striking shift from the 2022 valuation, when the scheme stood at around 65% funded. In short, the scheme has moved decisively from deficit recovery into sustained overfunding.
That shift has unavoidable implications for contribution rates. On prudent assumptions, future services costs are around 15%—falling closer to 6% once surplus is taken into account—yet employers continue to pay contributions of around 21%, costing roughly £9 billion a year across the scheme. Even under highly cautious assumptions, those levels now appear materially higher than is necessary to maintain long-term solvency. These amendments do not seek root-and-branch reform; they ask whether the regulatory framework is still operating as intended and whether contribution setting remains fair, transparent and proportionate.
Amendment 14 therefore requires a review of Regulation 62 of the Local Government Pension Scheme Regulations 2013, which lie at the heart of how employer contributions are determined. The concern here is not actuarial prudence in valuing liabilities but contribution prudence—the policy choice to extract additional buffers from employers, even where funds are demonstrably in surplus. At the centre of this issue are the undefined concepts in Regulation 62(6): desirability, stability, long-term cost efficiency and solvency. Their ambiguity has allowed increasingly conservative interpretations to become embedded in valuation practice, driving contribution rates beyond what the funding position alone would justify.
So I would like to ask the Minister three questions. How do the Government define “desirability”? How do they define “stability”? And how do they define “solvency” in this context? If the Government cannot clearly articulate what these terms mean, how can they be applied consistently when determining contribution rates? If Ministers cannot explain their intent, how can those responsible for applying the regulations be expected to reflect the Government’s wishes rather than their own interpretation? Does the Minister accept that, in the absence of clear guidance, it will be pension funds and actuaries that end up defining these terms in practice? This interpretation will shape outcomes.
In practice, expansive interpretations of “stability” and “long term cost efficiency” can justify unaffordable contribution rates, diverting resources from adult social care, housing delivery and other front-line services, while offering employers little scope to make legitimate trade-offs. There is also a clear imbalance of power. Employers bear the full cost of contributions yet often have limited influence over outcomes. Practice on the treatment of surpluses varies widely, with some funds permitting release and others prohibiting it on opaque grounds. Does the Minister agree that greater clarity and consistency would plainly be beneficial?
Amendment 15 asks a simple but necessary question: is the Local Government Pension Scheme affordable in the long term? It requires a review of long-term costs and sustainability, including impacts in respect of admitted bodies such as housing associations, with the findings reported to Parliament. This is an attempt not to undermine the LGPS but to ensure transparency, proportionality and long-term affordability—principles this House has always upheld.
This analysis is not abstract; a growing body of concrete cases now demonstrates how these regulatory interpretations are operating in practice. I would be very happy—indeed, delighted—to share the full set of these examples with the Minister, should he not already be aware of the scale and consistency of the issue. I trust that he will feel free to take up this offer if it helps.
I will briefly outline one such case. In this instance, the fund in question is assessed as being 107% funded on a gilts minus 0.2% basis. This compares with the previous valuation basis of gilts plus 2.3%. At the current valuation, the council had a reported surplus of £57 million. Despite that clear surplus, measured on an exceptionally prudent valuation basis, the contribution outcome is, frankly, striking. Under the fund’s stabilisation policy, the employer’s primary contribution rate is permitted to reduce by no more than 2%. At the same time, the employer is still required to pay approximately £20 million per year in secondary, or so-called deficit recovery, contributions. That outcome is extraordinarily difficult to justify. Secondary contribution rates exist for one purpose only: to repair deficits. In this case, there is no deficit. Assets exceed liabilities, even under assumptions more conservative than those typically employed by insurers, whose pricing is generally close to a gilt-flat basis. Yet, notwithstanding that surplus position, the employer is still being required to make substantial deficit recovery payments. The council involved has been forced to seek exceptional financial support from MHCLG.