LGPS contribution rate adjustments – what is the actuary’s role?

Earlier this year the Kensington & Chelsea Borough Pension Fund caused something of a stir by setting a zero employer contribution rate against the advice of its actuary.  But what exactly is the role of the actuary when it comes to contribution rate adjustments between valuations? 

The Royal Borough of Kensington and Chelsea, as administering authority of the Kensington and Chelsea Pension Fund, a fund within the Local Government Pension Scheme (LGPS), recently decided to set a zero employer contribution rate for the 2025-26 financial year. This decision, described as “unprecedented” by the Fund’s own officers, has led to concern among various stakeholders, including from the Fund's actuary, Hymans Robertson. This article explores how Kensington and Chelsea’s decision highlights potential uncertainty over the role of the actuary when giving statutory advice under the LGPS Regulations. 

The LGPS is a nationwide public service pension scheme, comprised of around 90 individual funds, and primarily for local government employees (although employees of some other types of employers can also join). It is funded by contributions from both employees and employers, with employer contributions fundamental to ensuring the LGPS’ long-term sustainability, as employers typically contribute a materially higher percentage of pay than members. As of 30 June 2024, the Kensington and Chelsea Pension Fund had a robust funding level of 207% on an ongoing basis.  This funding surplus prompted the review under Regulation 64(A) of the LGPS Regulations 2013 of the council’s contribution rate – Regulation 64(A) providing for reviews of employer contribution rates between formal valuations on certain triggers, including at the request of the employer, as in this case.

Kensington and Chelsea Fund’s investment committee decision to cut the council’s contribution rate to zero was made despite Hymans Robertson strongly advising against it. Hymans had instead recommended a reduced contribution rate of 7.5% of pensionable pay, half of the original 15% rate set for 2025-26, following the Fund's 2022 valuation. However, the investment committee argued that reducing the contribution rate to zero would not have any detrimental effect on the ability of the Fund to meet benefits, citing the strong funding position.  Hymans agreed with the premise that the nil rate for a year would not materially affect funding levels, but advised, nonetheless, that it would be inappropriate for the actuary to certify the zero rate.

Under Regulation 64(A), there is ambiguity on where authority lies in revising the contribution rate. Although the Regulation states that the “administering authority” may revise an employer contribution rate (suggesting the power is with the administering authority), the Regulation also refers back to Regulation 62, which expressly gives the actuary power to set contribution rates following triennial valuations. Therefore, there is some uncertainty whether the actuary’s certification is required to set a new contribution rate between formal valuations under Regulation 64(A).  On balance, the power is probably with the administering authority, and this appears to be the approach taken by Kensington and Chelsea.

What is clearly stated under Regulation 64(A) is that, when considering any revision of contribution rates, administering authorities must have regard to the “views of an actuary”. When focusing on this aspect, the Kensington and Chelsea case then raises some interesting questions about precisely on what issues actuaries should opine.

The advice given by Kensington and Chelsea’s actuary was tabled at the Fund’s investment committee meeting earlier this year and is publicly available. It is clear from this advice that part of the reason the actuary was unable to support the decision was on actuarial due diligence grounds – the actuary had not been instructed to undertake formal actuarial modelling of the longer-term impact of a zero contribution rate. However, other reasons for the actuary objecting related to governance rather than actuarial consideration, including:

• the risk of employer expectations that the zero rate would continue beyond 2025-26;
• the potential wider implications of a zero rate, such as discouraging academy conversions of council maintained schools (presumably due to academy trusts having to pay a higher employer contribution rate);
• that the administering authority should take legal advice (potentially from Kings Counsel) about the decision and also liaise with the LGPS Scheme Advisory Board and the Ministry of Housing, Communities and Local Government (MHCLG); and 
• that MHCLG would likely object to the decision to set a zero rate.

These governance issues are clearly relevant to the decision making (and the actuary was, in fact, correct that MHCLG would be unhappy, with government now proposing that Regulation 64(A) should be amended to expressly limit its use).  However, where the Regulations require regard to the views of the actuary, should this be limited to actuarial advice, meaning consideration of what contributions are required now to fund the liabilities as they fall due in the future, or should / could the actuary advise more widely, such as on governance issues? In our view, where there is a statutory requirement to take advice from the actuary, the policy intention is likely to be that it is actuarial advice to which the administering authority must legally have regard.  Other advice may be helpful to inform decision making, but, under the legislation as it is now, it would be arguably incorrect for an actuary to withhold certification of an employer contributions revision merely on non-actuarial grounds, particularly where an administering authority takes legal advice on the wider governance issues – as appears to be the case with Kensington and Chelsea. 

The actuarial firms who advise the LGPS all provide administering authorities with wider consultancy services, including advising on governance. Governance issues (and other wider considerations) are of course relevant to the exercise of any statutory power by administering authorities, including under Regulation 64(A), and, in relation to these issues, many LGPS Funds may quite rightly use these consultancy offerings. This potentially gives rise to the risk that the statutory function of the actuary under the LGPS Regulations might sometimes become blurred.  

If you would like to discuss any of the above, please contact Michael Hayles or Ed Curtis.   This article was written by Ed Curtis and Serena Kutty