The London borough of Kensington and Chelsea’s investment committee voted to reduce employer contributions to its local government pension scheme to zero for the financial year starting April 1, going against recommendations made by a pensions consultant working with the council.
The U.K.’s local government pension scheme funds have an estimated surplus of more than £100 billion ($123.9 billion).
The zero employer contribution rate would run counter to the 7.5% rate proposed in a report commissioned by the council by investment consultant Hymans Robertson. The report was published in December, with the council having requested for its contribution rate to be reviewed in accordance with the LGPS Regulations 2013.
“All else being equal, if contributions are reduced now then there is a greater chance that they will need to increase in future,” said the report, authored by Steven Scott, an actuary in the public sector team at Hymans Robertson.
Following a valuation based on 2022 financial year figures, a 15% rate of employer contribution had initially been proposed for the next three years by Hymans Robertson in the December report.
In supporting the move to completely cut employer contributions for one year, a separate February report from Kensington and Chelsea council argued that surpluses were high enough to warrant the move, with the plan's funding level having moved to 207% as of June 30, from 155% as of March 31, 2022.
As of March 31, the total net asset value of the Royal Borough of Kensington and Chelsea Pension Fund was £1.8 billion ($1.3 billion).
In the Hymans Robertson report, Scott concluded that if the council moved to a 7.5% contribution rate, there was a greater than 67% likelihood that the pension plan would be fully funded at the end of a 20-year time horizon.
“Given the huge swings in funding positions we have seen recently, we think LGPS Funds should build contribution flexibility mechanisms into the results to give greater scope for reflecting future changes. Kensington and Chelsea won’t be the only LGPS fund in this situation, given the current strong funding levels in the LGPS and the pressures on finances across the public sector,” said Tim Gilbert, a partner at pension consultancy firm Lane Clark & Peacock, in a news release.
According to an LGPS Scheme Advisory Board report from December 2023, administering authorities wishing to review their own employer contribution should “consider very carefully” how they manage any conflict of interest between a role as an employer in the plan and the role as an administering authority.
