Steve Simkins brings our attention to work being done by the Government Actuaries for the Scottish section of LGPS.
In our time deprived lives, we may not have the time to ease through GAD reports, especially ones that look like they refer to 2023. Infact this report is a 16th September 2025 report and deals with the very real issue of what to do with excess money in LGPS funds and what it says to Scotland applies to England , Wales (and Northern Ireland)
Here are paras 1.23 to 1.33 – and a link to the independent report
1.23 As currently set out in CIPFA’s Funding Strategy Statement Guidance, we consider that the rate of employer contributions has been set at an appropriate level to ensure long term cost efficiency, if it is sufficient to make provision for the cost of current benefit accrual, with an appropriate adjustment to that rate for any surplus or deficit in the fund.
1.24 Given the healthy funding position of the LGPS Scotland funds, we have not raised any flags in relation to our long term cost efficiency metrics. Whilst most individual employers are now also in surplus, deficit considerations remain relevant for some. It is also important to remain conscious of risks associated with potential future changes to the scheme’s funding position.
1.25 Surplus usage is becoming an increasingly important aspect of the valuations. We acknowledge there are different approaches to the utilisation of surpluses and funds should consider relevant factors and the trade-off between competing priorities.
1.26 Funds appear to have made decisions having considered relevant factors. We have not flagged any funds in relation to surplus usage at this review. However, we note inconsistencies in outcomes will arise where funds place different weights on relevant factors. Chapter 7 highlights the notable variations that we have identified between individual funds’ approaches to stability and prudence in their use of surplus.
1.27 A key difference in the funding strategies relates to the use of stability mechanisms, surplus buffers, and asset volatility reserves. Differences in approach can have a material impact on the outcome of the valuations.
1.28 We therefore believe further clarity on the choice of stability structures, their parameterisation, and the impact of that mechanism on contribution rates would be helpful. The underlying reasons for these choices were also not always very clear from valuation reports. We believe transparency and public documentation of funds’ decision-making processes, and rationales, is important. This will enhance transparency and will allow stakeholders to more easily compare between funds. It will also aid future section 13 exercises.
1.29 Many funds reported a high probability that the assets held at the valuation date, allowing for expected future investment returns, would be sufficient to meet the accrued liabilities of the fund. It is important intergenerational equity is considered as part of funding decisions, in particular the balance between the interests of current and future taxpayers and employers.
1.30 Chapter 7 provides details of how we plan to analyse long term cost efficiency at future valuations. This explains that we will adopt a flagging approach in relation to surplus usage as part of those exercises.
1.31 This approach will be a mix of qualitative and quantitative analysis, to reflect the range of relevant considerations and approaches. We will expect administering authorities to have considered relevant factors and the trade-off between competing priorities.
1.32 From an intergenerational fairness perspective, we will highlight those funds which could be seen as retaining too large surpluses and not recognising their strong funding positions in their employers’ contribution rates. Conversely, we will use our surplus retention metric to identify any funds where larger contribution reductions, in respect of surplus, could lead to too great a risk in the short- to medium-term. (Plowman emphasis)
1.33 We will also provide general commentary on the overall expected evolution of the aggregate scheme’s funding position over time.
There follows a recommendation to Scottish funds – though it could be seen as a valuable contribution to the “surplus debate” for any other funded DB scheme that finds itself in that fortunate position.
Recommendation 3:
We recommend that ahead of the 2026 valuations SPPA consider whether additional guidance is required to:
support funds in balancing the different surplus considerations when setting contribution rates.
assist funds in enhancing the transparency and documentation of decisions relating to surplus usage, in particular on the balance between solvency and intergenerational fairness.
Thanks Steve- (thanks the Government Actuary’s Department)
Steve Simkins
Inter-generational fairness is a big issue that should be considered in private sector DB funds as well, whether open or closed.
In establishing a DB scheme an employer vested funds with the trustees to meet the costs of providing the defined benefits for past (within the scheme), current, AND FUTURE employees. Similarly employees were also making contributions towards not only their past and current benefit accrual but also the expectation of future benefit accrual up to retirement or leaving pensionable employment.
In switching to DC pension contributions, the employer, and employees, contributions and the assets leave the company’s asset pool into the individual pension pots of the current employees only. The existing pension fund then solely dedicated to the past employees and if estimated to be insufficient, the employer alone has to make up the shortfall out of its other assets over a very short period (compared to the expected lifespan of an open DB pension scheme). The employer then loses the opportunity to use the fund, its investment income, and the benefit of member contributions to fund the pension rights of its future payroll. There appears to be little recognition in the decision making processes surrounding “end game” planning of the effect on the future employment costs and growth prospects of the employer.
We therefore have the obscene scenario of a quoted company with £1.1BN in its ring fenced pension assets and paying out pension benefits at a stable rate of £42M per year ending up ending up 5 years later with a surplus available to the company of less than £100M after a bulk annuity purchase transaction and an investment policy targeting solely the BPA transaction (LDI). The company also has a future DC contribution set at a rate which seeks to reflect the loss of the DB pension promise to its employees. What has that done to the value of the Company, and as repeated in many other employers to national growth prospects and financial institutions.
It is no less important in the private sector that intergenerational equity is considered as part of funding decisions, including the method of using existing pools of assets ring-fenced for pension provision. As a nation we need to ensure that they can be used to enhance the pension prospects of future employees. To me it seems obvious that should not be by using them to pay DC contributions, either directly or indirectly!
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