As Local Government Pension Scheme (LGPS) funds prepare to set employer contribution rates from 1 April 2026 for the next three years, emerging results suggest employers are being asked to pay on average 17% of pay compared with Isio’s “low-risk” rate of 6%.

Is this necessary prudence or over-caution?

By Katy Taylor, Director – Public Services at Isio

This is the most important and challenging LGPS actuarial valuation for years, as it raises crucial value for money questions around the best use of resources. Isio calculates that £6bn a year is at stake, money which could potentially be directed towards bridging the funding gaps of local authorities and supporting education, housing and other local services.

Councils, universities, housing associations, multi-academy trusts and other LGPS employers are expected to be asked by their LGPS funds to pay on average around 17%* of pay towards the funding of LGPS pension scheme liabilities whilst Isio calculates that, with an overall LGPS surplus of £87bn**, a rate of 6%*** of pay should be sufficient.

Reflecting on conversations with funds and employers to date, this is sometimes mistaken as a question of whether there is any risk of a fund not providing security of benefits to be paid to LGPS workers in the future – but of course there is always a risk when predicting the future, and that is precisely the key risk that a Defined Benefit (DB) pension scheme needs to manage.

Instead, the key consideration at this valuation is the relative size and balance of this risk versus the health and needs of the employers supporting these liabilities, particularly when there is such a large surplus to access and make use of, as well as employers wanting and needing the money right now.

Many UK defined benefit (DB) schemes are now sufficiently well funded to be able to pass all their liabilities to an insurer. However, record levels of buyout activity in 2025 mean insurers are increasingly selective about which schemes they engage with. For the smallest schemes, including those with fewer than 100 members (so called “micro schemes”) this leaves many struggling to reach their endgame destination of insurance.

There are around 5,000 private sector DB schemes in the UK, of which nearly 2,000 have fewer than 100 members. Despite often being well funded, these schemes face roadblocks across administration, data, investment, and broking. With the right preparation and guidance, these hurdles can be overcome – allowing micro schemes to reach their destination quickly and securely.

Administration capacity – traffic jams and potholes

Administrative capacity remains one of the most significant potential roadblocks for micro schemes moving towards their endgame objectives. Third party administrators often prioritise larger mandates, leaving micro schemes at the back of long traffic jams for essential data projects such as GMP equalisation and preparing data to send to insurers.

Potholes in scheme data are magnified for micro schemes which don’t have the luxury of missing data being lost in the rounding. Historic inconsistencies, incomplete member records and gaps in reconciliation all undermine insurer confidence. However, by tackling these data issues early, schemes can present clean, trusted records that make them attractive to insurers.

For larger schemes, well-resourced data projects have become routine in the years leading up to endgame. Micro schemes rarely have the budget or the internal capacity for such work, leaving them facing extended timetables and higher advisory costs in the long term, eroding the advantages of being financially ready for buyout. Focussed and proportionate data exercises can remedy this problem, delivering insurer-ready information efficiently and affordably. This not only shortens timetables but helps schemes make the most of their financial readiness for buyout.

Across the pensions industry, conversations about AI are happening at pace. Trustees are rightly curious about how far the technology can go: can it speed up processes, improve accuracy, or make administration services more intuitive for members? AI has massive potential, but the rush to deploy it can sometimes create a risk of fixing the wrong things and creating solutions that don’t benefit members.

AI washing, where bold claims prove to be unsubstantiated, is increasingly common. AI is powerful, but it is not a silver bullet. It cannot fix unclear processes, unstructured data, or a lack of insight into what members actually want and need. Its limitations matter – not because they diminish its usefulness, but because they influence how trustees should think about deploying it safely, responsibly, and with members in mind.

The real opportunity is to use AI as part of a broader shift: one that begins with understanding people and ends with better decision-making, more empathetic interactions, and a service that feels built around members rather than systems.

A foundation of understanding

Every effective use of AI in pensions starts with a deceptively simple question: what are members trying to achieve, and where are they getting stuck? Without this foundation,  technology improvements in isolation risk shifting the member experience in the wrong direction.

Taking a step back is essential. Before implementing digital transformations, trustees need clarity on:

• What members are asking for in their day-to-day interactions.
• Where processes routinely slow them down or create confusion.
• Which tasks genuinely require human expertise and judgement.
• How administrators currently prioritise their time, and where capacity is being lost.

AI can play a role here. For example, at Isio we’ve used it to analyse 10,000 anonymised member interactions. This is not a technical exercise. It is a human one. It’s allowing us to create innovative solutions built on insight gathered from real member behaviour – the words people use, the patterns in their questions, and the moments when they need reassurance rather than efficiency.

When trustees begin with this kind of understanding, AI stops being a solution in search of a problem. Instead, it becomes a tool that can reinforce the fundamentals of good administration: clarity, accuracy and empathy.

AI is not the starting point – it is an accelerator

There is sometimes an expectation that AI can deliver sophisticated outcomes straight away: interpreting rules, validating data, or handling complex enquiries. But even the most advanced AI involves probabilities rather than certainty. It can accelerate processes and identify patterns, but it cannot replace the careful, structured thinking that underpins a well-run scheme.

That is why the foundations matter. Clean data, well-designed workflows, consistent documentation, and robust governance are not optional prerequisites – they are the conditions that allow AI to genuinely enhance outcomes. Without them, the results may be inconsistent, and trustees risk looking to AI for tasks it cannot reliably fulfil.

The message for trustees is not to lower their expectations of AI, but to put them in the right order. First comes understanding. Then comes structure. Only then does AI add meaningful value.

On 26th November, Chancellor Rachel Reeves delivered her second budget. Our experts share their initial thoughts on what it means for pensions and broader savings from the perspective of employers, trustees and individuals.

Impacts for employers, trustees and individuals

Salary sacrifice changes to drive employer action

Mark Jones, Employee Benefits Partner, commented: “The Chancellor has delivered a Budget that increases taxes on employees’ savings.  Firstly, by freezing tax and NI allowances on wages, then by applying NI on salary sacrificed pension contributions above £2,000 and finally by increasing tax by 2% on savings income.

“Employers will already be thinking about making plans to offset the NI salary sacrifice loss long before these changes kick in from 2029. We need to see the detail around implementation but, for employers where a significant proportion of the workforce are making use of salary sacrifice above the £2,000 level, they are going to look for ways to mitigate any additional costs. That may include changing their scheme, so they don’t pay more than £2,000 in salary sacrificed contributions or changing the balance of remuneration with higher pay rises making up for reduced contributions.

“There is a long time for this to pan out, with three planned Budgets and potential even the next General Election to come before it comes into effect. Employers will be frustrated when they consider the amount of time and effort they are going to have to expend in complying with the new requirements and looking at alternatives to minimise the additional tax they will have to pay.”

Budget changes compound challenges from next year’s pension IHT changes

Mark Campbell, Head of Wealth, commented: “The changes announced in today’s Budget will compound the long-term financial planning challenges created by introducing inheritance tax (IHT) for defined contribution pensions in April 2027.

“By deciding to increase income tax rates on property, savings and dividends –  and from 2029,  introduce National Insurance on pensions salary sacrifice contributions above £2,000 – on top of what is already planned for next year, the Chancellor introduces a whole new set of disincentives and costs to saving and investing for the long-term, including for retirement.

“Much of the wealth that is saved, invested and eventually passed down, including through pensions, supports today’s younger generations with important life events like getting on the housing ladder, weddings and having children, which make significant contributions to the economy. Tax doesn’t have the same multiplying effect.

“We need to explore more intelligent solutions for incentivising an investing culture in the UK and, with it, long-term financial goal setting and security, particularly in retirement. Solutions should focus on the transfer of wealth to where the gaps in ability to save for the longer-term sit, ensuring that the next generations benefit from the asset growth their predecessors have benefited and which may not be repeated, be that property or indeed pensions.”

Mansion Tax is indiscriminate and flawed

Mark Campbell, Head of Wealth, commented:“While the intent behind the ‘Mansion Tax’ may appear fair on paper, the proposal is indiscriminate and makes a flawed assumption that those living in homes worth over £2 million have the liquid wealth or income to pay such a tax. It risks penalising people who are “asset rich, cash poor,” particularly in regions like London and the Southeast, where high property values don’t necessarily reflect high incomes. Many will still have significant mortgages, especially as fixed-rate terms end and interest rates bite, while property values themselves could be negatively affected.

“It also fails to account for circumstance or tenure. Someone who bought their home decades ago and now lives on a pension could face punitive costs simply for staying put and, if forced to move, they would face further burdens through stamp duty and potential capital loss. The measure also raises questions of fairness between those who own a single property and others with multiple, smaller assets.

“For some, particularly those nearing retirement or with limited pension provision, this could accelerate downsizing and disrupt family and community ties. And at a broader level, it risks sending a message that the UK is a less attractive place for wealth creators, entrepreneurs and investors. We should be encouraging people to stay, invest, and contribute to a thriving economy, not pushing them away. People don’t stay for the weather; they stay for opportunity, stability, and a fair, predictable tax environment.”

Reduced cash ISA limit will have unintended consequences

Mark Campbell, Head of Wealth, commented: “The reduction in the cash ISA limit from £20,000 to £12,000 may encourage some individuals to invest for the future, which is a good thing so long as they have suitable time horizons, understand how to invest and the risks associated.

“But there is also the risk this will shoe-horn people without the knowledge and experience into the investment market, or detrimentally cause them to place more of their money into regular savings accounts where the tax rate is now set to increase.

“Ultimately, we need to encourage an investment culture through education, which should start with children in schools. In the meantime, there should be continued focus on ensuring people have access to personal advice that ensures that they make informed and well understood decisions.”

Measures for entrepreneurship seem insufficient

Rob Agnew, Partner & Head of Private Office, Isio, comments: “The Chancellor has clearly indicated a desire for the UK to become a hub for entrepreneurs and fast-growing firms. However, while the 2025 Budget includes some targeted measures, they appear insufficient to genuinely attract entrepreneurs – particularly when set against the profound impact of previous reforms to capital gains tax and inheritance tax.

“Elsewhere, the Budget has doubled the eligibility thresholds for Enterprise Management Incentives (EMI) and increased the limits for Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) to £10-20m for Knowledge Intensive Companies (KICs). Yet despite these advancements, their attractiveness is diluted by other measures, such as the reduction in income tax relief on VCTs from 30% to 20%.

“For wealth creators and entrepreneurs looking either to pass businesses to heirs or to exit after successful ventures, the cumulative burden of these policies can often outweigh the incentives. Ultimately, the Budget is notable more for what it omits than for what it includes, particularly the absence of substantial reforms to the tax and succession landscape that could meaningfully drive national investment.

“Taken together with recently announced increases in capital-based and property-related taxes, and earlier restrictions on pensions and inheritance, the broader direction of taxation for the wealthy in the UK indicates a continuing trend of targeted tax hikes on wealth creators. For globally mobile individuals, this looks less like an invitation to relocate to the UK and more like a signal that the country is increasingly aiming to fund social and investment priorities by relying more heavily on accumulated wealth and asset-derived income.

“This creates a growing disconnect. The UK continues to offer deep markets, a strong rule of law and public-investment-led growth, yet the tax trajectory for the wealthy remains one-way. This is unlikely to halt – and may indeed reinforce – the trend for entrepreneurs and high-net-worth individuals to diversify their residences and establish alternative bases in other jurisdictions, such as the UAE.

Executive summary

• As at 30 September 2025, the estimated aggregate funding level for the LGPS (E&W) was 147% funded on a low-risk basis
• The aggregate funding level was 67% at 31 March 2022 and has remained at significantly higher levels since 31 May 2023
• The improvement in funding level is largely due to the significant increase in UK Government bond yields and improvements to asset values

Introduction

This update sets out the latest low-risk funding position for the LGPS (E&W).

The estimate has been carried out as at 30 September 2025 and assumes a ‘low-risk’ funding basis for the liabilities, i.e. the basis that would apply if assets were fully invested in liquid, low-risk investments, such as government bonds.

The aggregate funding position has been calculated by combining the individual results for each of the 87 pension funds participating within the LGPS (E&W). Please note that within this release we have not shared our estimates of the fund specific results, this information will be shared once more accurate data becomes available.

Please note that the numerical information set out within the update has been calculated using approximate methods, based on information available within the public domain (not necessarily the most recent), and has been provided for information purposes only. Note that in line with the previous release, we have made allowance for updated asset and cashflow data produced by the Ministry for Housing, Communities and Local government (MHCLG) as at 31 March 2024, further information is available in the Appendix linked below.

The information set out within this update should not be considered as advice or be relied upon in making any financial decisions. Further information is detailed in the Appendix linked below.

Background and purpose

Market conditions for pension schemes have improved significantly since the most recent LGPS (E&W) actuarial valuations were carried out as at 31 March 2022. The value of liabilities assessed with reference to gilt yields has fallen dramatically. This has led to material improvements in funding levels for funds and their employers, and indicates that funds should:

• Consider their funding and investment objectives in light of significantly improved funding levels (these may differ when levels are approaching or exceeding 100%)
• Actively review investment strategies, specifically considering whether de-risking opportunities should be taken advantage of
• Consider whether certified employer contributions should be reduced before 1 April 2026 to avoid overfunding
• Recognise the differing needs of their employer base and enable their participating employers to agree funding and investment arrangements that reduce current contribution rates and/or ongoing risk exposure

The purpose of providing this update is to:

• Highlight the very significant funding improvements experienced since 31 March 2022  
• Provide an update to track the evolving funding position and the impact of changes in market conditions since the launch of the Index and later reference points
• Monitor funds’ responses to these improved funding positions, considering investment strategy and employer engagement

Current market conditions are very good news for the LGPS and present an immediate opportunity to enhance long-term sustainability for funds and their employers.

Changes since previous release as at 31 March 2025

• Since 31 March 2025, the estimated aggregate funding level for the LGPS (E&W) has increased from 126% to 147%
• The improvement in the funding level is due to improvements in UK Government bond yields and lower future inflation expectations, both of which reduce the value of liabilities. Asset values have also increased over the period
• 86 of the 87 funds have funding levels greater than 100%
• A comparison of the estimated aggregate asset and liability values as at 31 March 2025 and 30 September 2025 is set out in the chart below:

Aggregate results

We show below the change in funding level over the period from 31 March 2022 to 30 September 2025 for the LGPS (E&W) in aggregate.

• The funding level for the LGPS (E&W) in aggregate as at 31 March 2022 was approximately 67% when calculating liabilities on a low-risk basis
• Over the period to 30 September 2025, the aggregate funding level has increased to 147%
• Significant volatility was experienced in September 2022 due to the release of the UK Government’s Mini-budget
• Since the Mini-budget, the aggregate funding level has remained consistently higher than as at 31 March 2022 (an average of 110%), allowing funds to reasonably consider the four points listed at the top of this update

Trustees have been captivated by the opportunities offered by Artificial Intelligence (AI), Robotics and related technology. They are rightly demanding more from their pension administrators. But could this come at the risk of losing the people-first approach that has always sat at the core of our exceptionally complex pensions industry?

Trustees face a perfect storm

Trustees’ duties go far beyond statutory obligations. They have a duty of care to members – to support them at crucial times in their lives. They must be prepared to meet new regulatory demands, while also managing large-scale scheme transformations.  

They are faced with expensive GMP equalisation projects, the requirement to connect to the Pensions Dashboard and increasing pressure from the Regulator to enhance their levels of oversight. Adding to this complexity is a resource crunch of experienced administrators who understand our complex pensions arrangements. The “typical member” is also changing – demanding self service and on demand apps. Is AI that secret sauce that will solve all their problems?

Amid this perfect storm, is there a unique opportunity for fresh thinking – a chance to reshape how Trustees can deliver a  high quality of services to their members?  

The traditional approach to technology 

AI does have the power to revolutionise every aspect of how we work. There is a risk, however, that the pensions industry views it primarily as a way to cut costs.  

Just as offshoring can reduce overheads without improving service or satisfaction, so AI can automate processes and interactions without benefiting members. The resulting experience is self-service, transactional and lacking empathy. It’s like navigating a maze full of sharp angles and dead ends, with your destination obscured from view and human assistance hard to come by. 

Just in time for summer, the Government has launched two pensions reviews, but has ducked the chance to review the design of the state pension. The reviews include:

• A revived Pensions Commission to look at ways to prevent tomorrow’s pensioners being poorer than today’s and with a remit to consider the long-term future of our pensions system.
• A review of the State Pension age, which is broken down into two parts (a review from the Government Actuary on the proportion of later life in retirement and another independent report on other relevant factors that should be considered).

Pensions Commission

The relaunched Pensions Commission will explore the complex barriers stopping people from saving enough for retirement, with its final report due in 2027. It will look to tackle are the statistic that retirees in 2050 are on course for £800 or 8% less private pension income than those retiring today and that 40% of people, nearly 15 million, are under-saving for retirement.

It will examine the pension system as a whole and look at what is required to build a future-proof pensions system that is strong, fair and sustainable. Focusing on:

• Three million self-employed people who aren’t saving
• Why three-quarters of low-earners in the private sector are not saving
• Why only a quarter of those from a Pakistani or Bangladeshi background are saving
• The 48% gender pensions gap that sees women’s private pensions at retirement being roughly half of men’s; and
• Changes to increase retirement saving including through increases to the minimum contribution requirements under automatic enrolment.

The Commission will include Jennie Drake (who participated in the 2006 Pensions Commission) the businessman Sir Ian Cheshire and Professor Nick Pearce, who will steer the group. It will work closely with the CBI and TUC.

The review will consider increasing contribution rates from their current 8% on the automatic enrolment earnings band, potential changes to the minimum and maximum age bands and the earnings thresholds. It will also consider poor savings rates among the young, lower-paid, women and the self-employed, with the drop in savings rates among the latter, from nearly half in the 90’s to fewer than 20 per cent now leaving nearly three million of the self-employed failing to save.

While the pensions industry has been urging Government to move towards a 12% contribution rate, Ministers are clear that no changes to rates will happen in the current Parliament.

State Pension Age reviews

Despite recent reports indicating that the Triple Lock is increasing the State Pension as a proportion of GDP at an unsustainable rate, the Government has limited the assessment of the State pension to the minimum it legally required to do. 

The review into the State Pension age (SPA) will be carried out by Dr Suzy Morrissey which will report on factors the government should consider in relation to the SPA. The 2023 Review of the SPA planned a review within two years of the current Parliament enabling the government to consider the planned rises to 67 and 68 (scheduled to be phased in between 2044 and 2046). This will ensure that the government is able to consider the latest information which was not available to the independent reviewer during the 2023, including 2021 Census data, the current economic position and the impact on the labour market of Government measures to tackle inactivity.  

The 2023 review found that the rules for the planned rise in the State Pension Age from 67 to 68 were appropriate, but that alternate options could be considered as they would meet the 10 years notice period (stipulated by the previous government).

The Government Actuary’s Department will prepare a report on the proportion of adult life in retirement. The previous SPA report was complemented by one from Baroness Neville-Rolfe, shortly after the COVID-19 pandemic, that supported the target of 31% of adult life being spent in receipt of the State Pension – these stymied plans to bring forward the current timetable for increasing the SPA to 68.

Research reports

The review launches are accompanied by a series of research reports:

• Analysis of Future Pension Incomes
• Analysis of Future pension incomes 2025
• Planning and Preparing for Later Life 2024
• Gender Pensions gap in private pensions: 2020-2022
• Analysis of automatic enrolment savings levels
• Workplace pension participation saving trends and statistics

Isio’s view

We welcome the launch of the Pensions Commission. There is a clear need to focus on ways to widen and deepen private retirement saving in the UK. The reviewers will need to tread a fine line to come up with policy suggestions that balance simple messages for employees and retirees with a structure that is transparent about when and where retirement provision is self-evidently beneficial and when it pays to take care of today’s rather than tomorrow’s plans.

The Commission will have the opportunity to weigh up the substantial body of research and evidence on savings and to give the Government a clear route to bridging the savings gap for current workers, including tackling the gender gap that stubbornly persists. Measures to drive up contribution rates as individuals progress through earnings levels while easing off when earnings drop can help generate the collective understanding needed to deliver better retirement outcomes.

It does feel like the Commission will be working with one hand tied behind its back, as its remit does not include looking at the design of the State Pension which is the foundation for most savers retirement planning. While the State Pension Age element will be reviewed, this ducks issues of wider adequacy and affordability in the long-term, e.g. the ratchet effect of the Triple Lock. While the Triple Lock has provided a welcome short-term fillip for pensioners it is difficult nettle for politicians to grasp, as evidenced by the recent analysis showing it has cost 3 times more than originally expected but the Government has committed to it for the remainder of this parliament. Building consensus on a sustainable future indexation policy is essential. The State Pension will remain the cornerstone of the UK’s retirement provision but clarity about what proportion of average earnings it delivers needs to be tackled. Delivering consensus on such a politically charged matter is not a small job and not including it within the Commission’s remit feels like a missed opportunity.

Too much finessing at the edges to provide additional support for those on lower incomes cannot detract from the building up broader and deeper retirement provision for those in the workforce. A strong base with clear incentives to save has to be set out sharing the responsibility for saving between employers and individuals in a way that provides a pension system fit for the long-term.

We hope the Commission will be able to make progress on improving employees’ financial resilience as well as boosting the attractiveness of pension savings. This includes considering pensions sidecar savings products, allowing individuals to access pension savings for emergencies or specified longer term objectives (e.g. a house deposit).