“Dripping with Money” – a Local Government Pension Fund funding problem


Announcing unaudited annual report to April 2023, Richard McIndoe of Strathclyde Pension Fund described his funding position as “dripping with money“.

  • -1.6% investment return for the year
  • -£495 million investment loss for the year
  • £27.9 billion closing value as at 31st March 2023
  • +8.2% p.a. investment return over the last 10 years
  • £729 million total pensions and lump sums paid over the year
  • Total membership increased to over 277,000
  • +10.1% inflation increase applied to all members shortly after the year end
  • £200 million of new investments by our Direct Impact Portfolio (DIP)
  • DIP investments now produce enough green energy to fuel over 277,000 homes

The report concludes

  • In spite of the small loss on investments and the cost of the inflation increase, SPF’s funding level is expected to have improved significantly over the year.

  • This will be confirmed in the actuarial valuation as at 31st March 2023 which will be completed over the coming months.

A well managed schemes that survived a tough year intact

Like many other LGPS schemes Strathclyde picked up healthy returns from impact investments made to help his region “level up”. The scheme had avoided investing heavily in gilts and was profiting from a higher discount rate on liabilities – resulting from increases in interest rates.

In a discussion at the PLSA Local Authority Conference, the audience was asked to consider how they would use the developing surplus. Options included adjusting the asset allocation of the scheme, lowering employer contribution rates, building a buffer within the scheme.

40% of votes were cast to improve the levels of prudent funding in the funding targe

31% of votes were cast in favour of reducing employer contributions

14% voted for changing the investment strategy

10% suggested retaining the surplus as a buffer

2% voted for “no action needed”

There was no option to use the surplus for investing in increasing the membership of the scheme through promoting the scheme to leavers and those who have decided not to join the scheme,

When asked from the floor whether employers might be incentivised to extend the scheme to such groups through the promotion of LGPS’ 50/50 scheme or through subsiding the cost to employers of increasing membership, the response was simply “no”.

Can I hear the  voice of the member .

So far, the Conference has focussed primarily on investment matters with only two sessions focussing on operational issues. Though members have been discussed , it has been as “liabilities” and as “needing to be found”.

Discussions on the member’s ability to pay contributions have been confined to networking discussions as have conversations about members wishing to pay extra contributions as AVCs. This has surprised me as the last twelve months has seen a cost of living crisis hitting the low paid through food and energy inflation and now the middle earners suffering though spiralling mortgage costs.

The LGPS has a 50/50 Scheme which allows members to reduce their contributions by half in return for a 50% accrual rate – death and ill-health benefits remain the same so this is a financially attractive option for members who can’t afford full membership but who need the protection of the scheme. According to Richard McIndoe, take up of this arrangement has been negligible, members see membership as “all or nothing”.

While the primary purpose of these pension funds is to pay pensions, it is worrying that the cost of membership of these schemes seems to be so little of an issue. Many low earners who are eligible for the scheme under auto-enrolment do not pay income tax and – since LGPS is administered under “net-pay taxation” , do not receive any relief on contributions. The Government has recognised that this is unfair and has promised to fix the problem, However , there will be no cash coming back to those impacted till April 2025.

Considering news that 1 in 7 of the population are in food poverty, it is strange and disheartening to hear so little talked of this. The opening session of today, the final day of the Conference will be discussing this matter and I hope that some delegates will have had the chance to consider “affordability” while chomping their way through last night’s gala dinner.

Data may show consistently low opt-out rates through  the past five years and I have heard delegates tell me their members do not have an affordability issue. However, I suspect that most of the poorest savers, are suffering in silence. We should not assume that those who are enrolled in the scheme are aware of options of 50/50 or even of opting-out. Many people do not have the confidence to ask the questions, some are ashamed of showing their employers they cannot afford to pay a pension. It is not good enough to accept data on opt-outs as an indication that there is no problem.

Ironically, those people who have been using the 50/50 scheme are reported to have generally done so to stay within the annual allowance restrictions, Happily for them, many can now move back to full accrual – not for affordability reasons , but to maximise the tax-efficiency of their pension accrual. It would be hard to think of a scheme that has been used for such perverse reasons – relative to the scheme’s intention!

An outsider’s view

While I have been happily surprised by the delegates of this Conference and by the speakers, all of whom show passion, professionalism and conviction, I would question whether the voice of the member is being properly heard.

My “outsider’s view” is that the use of “dripping with money” is a little tone-deaf to the state of most member’s current finances.

The surplus that an LGPS fund has today, is partly down to the skill of its investment management team, but for a larger part, it is an accident of macro-economics for which funds can take no credit.

It is up to those who run these funds to make members aware of the improved security, but they must do so mindful not just of the member’s future , but of the member’s present circumstances.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “Dripping with Money” – a Local Government Pension Fund funding problem

  1. jnamdoc says:

    Great updates from this important conference, Henry.

    Well done too to the Strathclyde Administering Authority – the benefit of compounding long term returns showing what pension schemes can do when unfettered by the LDI cult-mindset of TPR!? Please keep TPR away from LGPS!!!

    “Dripping with money” – remember that when your local services are being cut, because of course underpinning that are excess contributions stripped right out of the pockets of the businesses, local authority employers and employees across Strathclyde, and which is doing virtually nothing to support investment and growth, schools, hospitals and other necessary services in that local area – which by the way is in such desperate need of it.

    Most of that £28bn will funnel its way through investment houses in “the City”, where they will take their cut each year. I wonder if the people and councillors of Strathclyde understand how much of their fund will be siphoned away each year to London?

    Emergency valuations required, and a re-setting to lower contributions that can be better recycled into local services?

  2. John Mather says:

    Would it be a good idea to turn pension funds into banks?
    There are no U.K. companies capitalised at £369bn
    As of September 2021, the market values of the top ten listed U.K. companies are as follows:
    1. AstraZeneca PLC – £122.6 billion
2. BHP Group PLC – £122.2 billion
3. BP PLC – £73.9 billion
4. British American Tobacco PLC – £61.7 billion
5. Diageo PLC – £70.2 billion
6. GlaxoSmithKline PLC – £71.2 billion
7. HSBC Holdings PLC – £92.2 billion
8. Rio Tinto PLC – £88.7 billion
9. Royal Dutch Shell PLC – £114.7 billion
10. Unilever PLC – £111.2 billion
    As of September 2021, the market capitalization of the top ten U.K. banks is as follows:
    1. HSBC Holdings PLC – £92.2 billion
2. Lloyds Banking Group PLC – £32.7 billion
3. Barclays PLC – £32.6 billion
4. Royal Bank of Scotland Group PLC (NatWest Group) – £29.4 billion
5. Standard Chartered PLC – £20.9 billion
6. Santander UK PLC – £18.2 billion
7. Nationwide Building Society – Not publicly traded
8. Virgin Money UK PLC – £2.9 billion
9. CYBG PLC (Clydesdale and Yorkshire Bank) – £2.4 billion
10. Metro Bank PLC – £1.1 billion
    Did any of these have a return greater than 8%

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