LGPS 2025 Valuations

Looking back and moving forward

It has been a turbulent couple of years since the last triennial review of LGPS funds in England and Wales, so what impact might this have had on funding positions? And what can funds be doing now to ensure they are well prepared for the next review in 2025? Matthew Paton recaps the journey we have been on during the current valuation cycle, before detailing the road ahead.

Tap each box to open.


The cost-of-living reached a 40 year high during the inter-valuation period, with global supply chains struggling to match increased demand after two years of Covid lockdowns. This was exacerbated by the war in Ukraine, which continues to cause further disruptions to supply chains and a global spike in energy prices. 

The result was a gargantuan pension increase order of 10.1% in 2023 and a lower, yet still significant, pension increase order of 6.7% in 2024. Inflation has also fed through to hefty salary growth in many sectors, leading to higher final salary benefits building up in the legacy schemes. 

In isolation, inflation has caused a significant increase in liabilities. The good news is that much of this was already anticipated back in 2022, with an allowance for higher short-term inflation being built into our financial assumptions and hence the resulting contribution plans. Many funds also incorporated higher prudence in their assumptions to combat the risk of inflation staying higher for longer.  

High inflation has also caused funds to have a closer look at their cashflow position and investment strategy as funds could now be paying out more in pensions than they receive in contributions. Our cashflow modelling tools have come in useful here. 

Now that inflation has started to fall, we are able to reduce our expectations for future inflation and, if need be, some of the additional prudence incorporated in 2022. This is expected to broadly offset the inflationary driven increases in liabilities we have seen recently.  

The higher interest, higher inflation environment of the last two years may however have put pressure on employers’ ability and willingness to pay contributions. Indeed, figures from The Insolvency Service released in January paint a bleak picture of the financial stress under which many employers now find themselves, with the number of insolvencies in England and Wales hitting a 30 year high in 2023. 

In light of this, we are keen to help funds review the covenant of their employer base in advance of the 2025 valuations. We can then use the results of this exercise to develop tailored funding strategies and ensure that contributions are set appropriately. 

Related to this, it is very important that accurate information is held for all employers, and to support funds here we have recently launched LGPS Manage. This is a shared, online database which can be updated as employer activity evolves. The information held here will then feed into the calculations and funding strategies to be adopted in the valuation. 

Investment returns

2022/23 was a difficult year for the markets. In a bid to combat rampant inflation, central banks began hiking interest rates and soon afterwards markets started to price in a risk of recession, which in the end did technically materialise. The effect was a decline in equity and bond markets, with most funds posting flat or negative investment returns for the year.  

2023/24 was much more palatable. We saw a significant rebound in equity markets as inflation began to fall sharply and more investors considered that the cycle of rate hikes was nearly at an end. This strong performance, so far at least, should broadly offset the weakness experienced in 2022/23. 

Overall, we expect that an average fund’s investment returns are currently reasonably close to the returns that were assumed back in 2022. As part of the 2025 valuation process, we will be reviewing the outlook for future returns in partnership with BW’s investment experts and the impact of that review may have a positive or negative impact on funding positions.  

We encourage funds to submit regular investment and cashflow data to us throughout the inter-valuation period so we can more accurately assess the development of funding levels. This will also lead to less work being required during the valuation itself. 

There has been some direction from the Government regarding various investment requirements such as a focus on UK equity, private equity and infrastructure. If any changes are planned, it is important to engage with your Fund Actuary and involve them in discussions with your Investment Consultants. 


At the last round of valuations, most funds experienced a significant reduction in liabilities due to the impact of the pandemic. This reflected both the heavy mortality that had actually been experienced as well as a tentative expectation that the lingering effects of the pandemic may dampen longevity improvements over the short to medium term. 

At the 2025 valuation, we will carry out a longevity analysis for each fund to determine how actual mortality experience has compared with the assumptions we made in 2022. This will vary by fund and could lead to a positive or negative contribution to the funding position. 

Our longevity experts will also take account of the latest research to assist us in setting new assumptions going forward. For example, analysis of mortality in 2022 and 2023 by the Continuous Mortality Investigation (CMI), with whom we work closely, has suggested that there have been no improvements in how long people are living compared with the years leading up to the pandemic. This is seen in the graph below which considers mortality rates relative to the 2015-2019 average: 

Source: CMI Working Paper 183

A key judgement at 2025 will therefore be how much weight to put on data from this new post-pandemic era and to what extent such data is likely to be indicative of future mortality. If we allow data from 2022 and 2023 to have an influence on our assumptions, then as of right now - and all else being equal - this leads to a fall in life expectancies and hence lower liabilities for funds. 

Since the 2022 valuation, the CMI have also published new mortality tables (the S4 tables). The underlying data feeding into these tables has a more significant proportion of LGPS data than before (around 10%) which should improve the “fit” for funds. As part of their analysis, the longevity team will ensure that the most appropriate table is used to represent each fund’s members.  

In the meantime, we advise funds to use our free online data checker to help validate changes in their membership data since the last valuation. This will mean much of the data cleansing work can be completed prior to submitting the final Universal Data Extracts to us next year. Information on the data checker, and all our other online tools, can be found here

Climate change

Back in 2022, funds were for the first time required to disclose how risks related to climate change had been taken into account in their valuations. This included a recommendation from the Government Actuary’s Department (GAD), as part of their Section 13 review in 2019, to carry out climate scenario modelling which considered the resilience of funding strategies to various temperature change outcomes.  

As part of their review of the 2022 valuations, GAD will comment on the analysis and we will work with them to shape the analysis for the 2025 valuations. Since 2022, there has been a growing recognition that climate change models, which are still in their infancy, can only provide a very limited and simplified view of what is a highly uncertain and complex risk. We are also aware of the hard work that is already underway across the LGPS in preparation for reporting under Task Force on Climate-Related Financial Disclosures (TCFD) principles. In recognition of this, our own preference would be to adopt a more “qualitative” rather than “quantitative” approach to the analysis of climate change risk as we move forward, although we must wait and see what GAD choose to stipulate. 

In the meantime, we have begun to roll out training on managing this unique risk to several funds, which has so far gone down very well with Pension Boards and Committees. Please get in touch with your usual contact if this would be of interest to you. 

"The in-person Climate training provided by BW was very well received by our Pensions Committee and Pension Board. The main presenter was very knowledgeable about his topic, and his approach, along with his well-balanced delivery style, kept the audience engaged throughout."
Claire Machej Lincolnshire Pension Fund

Gilt yields

Interest rates have risen significantly over the last few years, with a likewise substantial increase in the yield available on UK government bonds, although the picture has been one of exceptional volatility: 

Source: Bank of England UK nominal spot curve 


It is worth remembering at this stage that, for the LGPS funds we advise, these significant movements have generally had a minimal impact on funding levels. When we make assumptions about future investment returns, our starting point is the actual investment strategy of each fund and this tends to be heavily weighted towards return seeking assets, such as equities, rather than gilts. Our investment return assumptions are therefore largely driven by expectations of the long-term performance of growth assets, which we derive independently from movements in the gilt markets.  

Over the period, our “smoothed” funding model once again came to the rescue on various occasions, not least during 2022’s “mini budget” crisis, notable in the chart above, meaning there was no discernible impact on our funds’ funding levels during periods of short-term economic volatility. 

It is a different picture elsewhere.  

Schemes that are funded on a gilts-based methodology, but with a limited allocation to gilt investments or similar matching strategies, have experienced significant volatility. Many have seen sudden increases in funding levels by as much as 40% due largely to the rise in gilt yields. For such schemes, this has led to some calls for contribution reductions from participating employers. Echoes, perhaps, of the early 1990s when funding targets were reduced, contribution holidays were granted and less than ideal consequences ensued. 

The risk, too, of course is that such vastly improved funding levels could well begin to diminish significantly if, as is widely expected, the Bank of England begins to cut interest rates in the near future. 

Higher yields have made gilts and bonds a more attractive investment opportunity for some funds and so, to the extent that strategic asset allocations have been revised, this will be reflected in our investment return assumptions going forward. However, such changes alone are unlikely to lead to significantly higher discount rates than at 2022 (if at all) and hence we do not expect to report funding level increases of the scale that have been seen elsewhere.  

Given the relative fragility of the economic and geopolitical environment, we do not currently see any reason to expect that long-term investment growth will be substantially higher than expectations back in 2022. Our view therefore is that it is essential to adopt a grounded funding model which targets stability and is not unduly influenced by any one single market indicator, particularly one as volatile as gilt yields. At the time of writing, we expect that we will be able to achieve stability for most funds and, for those in a fully funded position, the approach to surplus management will be a key consideration. 

Final thoughts

It goes without saying that we are still some way off the valuation date and, if the last few years are anything to go by, there are likely to be further developments that help shape our views on the likely outcomes. As valuation preparations begin over the coming months we will be in touch with more information about the topics above, so please do keep an eye out for further communications from us.