Ros Altmann
2026 could be the year to ensure British pension funds back British growth – local government pension funds and private schemes can boost the economy.
- Growth is crucial to achieving future economic success – and increased long-term investment in UK businesses, infrastructure, property, start-ups and scale-ups is vital.
- Local Authority pension schemes have significant surpluses, so funds could be diverted to local services instead of spending around a quarter of council tax on employer pension contributions.
- Government should ensure private and public sector pension funds, which receive over £80billion a year in tax and NI reliefs, support Britain better.
Councils have a great opportunity to use their pension surpluses to boost local spending and take the pressure off council tax rises. The Local Government Pension Scheme (LGPS) for England and Wales was estimated at March 2025 to have a funding level of nearly 150%. These schemes are in record surplus, of around £150bn on a low risk basis.
As council pension funds prepare to set employer contribution rates for the next three years, there is a serious risk that they will pay far more than really necessary into their schemes, thus depriving local services of much needed funding.
UK defined benefit pension schemes like the Local Government Pension Scheme over the last three years have benefitted from the sharp fall in liability values, as long-term gilt yields have soared by around 3.5% since 2022. The estimate of future long-term liabilities i.e. the amount they need to set aside to pay future pensions, has fallen by around 50%, as inflation expectations have reduced and funding has benefitted from strong increases in asset values too.
LGPS surpluses can allow contribution holidays, diverting billions to local needs. Since all local authority pension schemes have significant surpluses, and about a quarter of council tax goes into pension contributions, encouraging councils to consider employer contribution holidays would help them meet local spending needs, take pressure off never-ending council tax rises. This can help boost regional growth, as well as helping reduce the fiscal deficit, as council calls for more central Government funding and pension reliefs will fall.
After years of deficits, new money can be spent on local needs. The pension fund surpluses have built up in recent years, meaning there is much more money in the local government pension schemes than they are expected to need to pay future pensions. So the billions of pounds in council pension contributions could be better spent on urgent local services. As QE unwinds, the huge additional contributions required in past years can now be offset by a temporary period of contribution holidays. Given the fiscal pressures, for the moment, it surely makes sense to divert the money to other local priorities.
Councils are estimated to spend around £7bn a year on employer contributions to LGPS Defined Benefit pensions. Pausing these contributions for the moment, can help the funding gaps that nearly all councils are facing and constitute a much better use of local government resources. Most of the £7bn would be for the benefit of local authorities, but schools and other employers providing local services would benefit too – which can also help meet local investment objectives. LGPS employer contribution rates are set by an independent actuary and are not fixed. They have averaged between 14% and 18% of employees’ pensionable pay. The specific rate for an employer is calculated every three years and can vary based on factors like investment returns and the specific employer scheme. Employers pay a significant majority of the scheme’s costs.
Some facts and figures:
| Average share of council tax spent on pensions | 23.5% |
| Total spent by all councils (latest year) | £6.7–7 billion |
| Councils spending >50% of council tax on pensions | 14–24 councils |
23–24% of total council tax revenue is allocated to employer pension contributions for local authority employees.[en.econostrum.info],
Based on FOI responses from 254 of 317 councils, councils spent an average of £5 billion, extrapolated to ~£6.7 billion — about 23.5% of council tax revenue.
Other sources corroborate that nearly £1 in every £4 of council tax is spent on pensions. [en.econostrum.info]
There are some large variations across Councils
Around 14 councils allocated over 50% of their council tax to pensions:
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- Basingstoke & Deane: ~106%
- Orkney: ~76%
- Cheltenham: ~75%.
60 councils were found to devote at least 20%, with 24 councils spending over 33%
HM Government’s Local Government Financial Statistics England 2025, No. 35 includes chapter 6 on “Local authority pension funds” and live tables on Council Tax receipts and revenues. [assets.pub…ice.gov.uk], [gov.uk]
Additionally, private pension funds could boost national growth. They should be asked to invest 25% of new contributions into UK assets, to ensure the £80billion in taxpayer incentives does not just help other countries, rather than our own: Trustees are frightened of being told how to invest by Government, but using the current system of tax reliefs, which cost taxpayers over £80billion a year, could ensure more pension funds invest in domestic assets, without the need to force them to do so. This is not mandation. If trustees want to put more than 75% overseas, they are free to do so, but they will not get taxpayer funds added. This is the quid pro quo for receiving such huge sums from other taxpayers.
By requiring say, 25% of all pension contributions to be invested in UK assets, including listed companies, unlisted firms, infrastructure, renewable energy, life sciences and real estate, the UK economic outlook could be materially improved. Some would argue that investing in listed companies does not boost growth, but that is incorrect. If there is a reliable flow of long-term investors seeking undervalued, high yielding or fast growing British businesses, then the whole corporate sector can benefit. The UK markets have become seriously devalued relative to other global equities. This means the cost of raising new capital is higher, the attractiveness of a UK listing is lower, the valuations of new companies is also reduced and many of our best companies can be snapped up on the cheap by foreign predators.
By restoring buying interest to British listed assets, there can be a spillover effect on other areas of the economy. Indeed, many pension trustees who point to UK markets underperforming other countries in recent years, as a reason to underweight or keep selling British companies, are ignoring the doom loop that this has created. If Government steps in to demand, on behalf of all taxpayers, that much more of the £80billion spent on pension incentives, is actually invested here, then the doom loop could start to become a virtuous circle. By insisting that more is invested in UK growth assets, and loosening the excessive risk aversion that has blighted our markets, the outlook for the markets and growth could be significantly improved.
How much of this investment will go into buy backs and senior management share incentives.? Some thought needs to be applied first.
The matter of inflation protection on pensions is a hot number presently in the House of Lords. It seems that there continues to be a policy of selectivity for some but others are left out in the cold especially those who claim retrospective pre-1997 inflation service loss. But, after that failure by previous governments those of us are trying to repair past damage caused by the Brown last century pension policy raid, by doing our own thing, and investing any low level pocket money directly in British company shares that maybe presently attractive?
The way these figures are presented could be misleading, suggesting that a very high proportion of council tax goes into pensions. How could so much be going into pensions relative to staff pay? Well, council tax is only one of a council’s sources of income. A lot comes from the government and other income comes from things like the various charges a council levies for services and for things like parking. What money a council could spend elsewhere also depends on how those other sources of income change.
It is not just local Government employers that are over-contributing for their pension promises.
The total current accrual cost of a 1/80th Minimum Rate revalued average salary benefit for an employer with a work force profile likely to be similar to a local Government employer was calculated at 31st March 2024 at 12.3% of pensionable pay. With employee contributions of 5% the employer’s funding cost is 7.3% before any adjustment to reflect past service surpluses or deficits.
The key metric to this calculation is not the then current gilt yield but the projected long term future whole scheme investment return (just under 6% p.a. was the assumption derived from a gilt plus valuation at that date). This should be then validated by an assessment of the Scheme’s assets to generate that return and consideration of the achieved long term investment returns (this was validated for this scheme by 8 measures of achieved performance over 1, 5, 10 and 15 years to two different valuation end dates – which showed that only one measure, a 1 year return, was below 6% and averaged somewhere around 7.5%p.a.). I cannot believe that a LGPS scheme should not be able to project similar returns.
The position of a private sector employer providing DC benefits is considerably worse. With a similar projected long term investment return total DC contributions of 18.5% would be required, which with a 5% employee contribution would leave the employer required to contribute for an equivalent pension outcome 13.5% of pensionable pay, with no prospect of a reduction from achieved investment out-performance. (Remember the Australian “Super” DC system mandates 12% employer contributions).
When the penny drops in both the local Government and in the private sector, then we will perhaps see pension schemes refocusing their investment goals on growth rather than matching an insurer’s pricing model. This will then allow a focus on reducing the cost base of the employer both in the public and private sector.
PensionOldie – all you say makes perfect sense. Please forward to DWP.
The “industry” for too long has lazily accepted and allowed the profit motives of the insurers to take over and singularly drive pension funding policy, and that includes DWP who have swallowed hook line and sinker the “gold standard” language without realising they were tricked by a marketing phrase and ploy, and that its contra to an economic framework for growth. No growth, no pensions.
I’m hopeful that for 2026 “the industry” can rediscover its proper purpose, being to improve the pensions of working people in retirement. Too many in “the industry” focus on the fees from their market share of buy outs, or increasing funds under management via contributions rather than growth or improved member outcomes.
I’m pretty sure future generations will look back quizzically as a case study as to what level of group-think-hysteria drove an advanced economy to systematically disinvest over £2trn (2019 values) of private sector (ie 2nd pillar, none State funded) pension savings, losing half
the value in the process, and then to curiously scratch its collective heads as to why there was a resulting absence of growth, an unaffordability of public services, and pensions lacking proper inflation protection.
The regulatory capture of the sector and diversion of value away from growth and improving member outcomes will make the Post Office scandal look like loose change.
I wish I knew who you two were, I would invite you for a meal at Beppes cafe West Smithfield – happy new year to you both and happy ne year to those in Westminster, Stratford and Brighton who read your comments!
How much of this investment will go into buy backs and senior management share incentives.? Some thought needs to be applied first.