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.