Ros Altmann is a former Pensions Minister who now sits in the House of Lords.
Local authorities spend around a quarter of the council tax they collect on pension contributions for staff.
However, their pension schemes have significant surpluses, so I believe these funds could be diverted to local services instead.
Councils’ employer contribution rates are about to be set for the next three years, and there is a serious risk they will have to pay in far more than really necessary.
This could be a great opportunity to use pension surpluses to take the pressure off council tax rises, and avoid depriving local services of much needed funding.
Lady Altmann: Local government pension surplus can allow councils to take contribution holidays
The Local Government Pension Scheme is a defined benefit – typically called final salary or career average – scheme that has an obligation to pay pensions owed to council staff for the rest of their lives.
Council taxpayers fund the employers’ pension contributions that cover most of the costs of the schemes.
But like other schemes of this kind it has benefited from a sharp fall in liability values, which means the amount it needs to set aside for these pensions is much lower than previously estimated.
This is because long-term gilt yields – the interest rate investors can get on lending to the Government by buying long-term UK bonds – have soared by around 3.5 per cent since 2022.
Pension fund surpluses have built up in the past few years, so there is now much more money in the LGPS than it is expected to need to pay future pensions.
The estimate of future long-term liabilities has fallen by around 50 per cent, partly due to the higher interest rates, lower inflation expectations, and because funding has benefited from strong increases in asset values too.
The LGPS for England and Wales was estimated at March 2025 to have a funding level of nearly 150 per cent.Â
This represents a record surplus of around £150billion which far exceeds the expected costs of the promised pensions.
Local councils can afford ‘contribution holidays’
The LGPS surplus can enable councils to take contribution holidays, diverting billions of pounds to spend on local needs and stopping never-ending council tax rises.
This can help boost regional growth, as well as reducing the central Government’s fiscal deficit, as council calls for more funding will fall.
After years when councils have struggled with shortfalls in their budgets, this would free up new money for local services.
Given the fiscal pressures on both the Government and local authorities at the moment, it surely makes sense to put council pension contributions towards other spending priorities.
Councils are estimated to spend around £7billion a year on employer contributions to LGPS defined benefit pensions, even though the schemes don’t technically need these sums.
Most of this money could increase local authorities’ ability to improve council services. Schools and other employers providing local services, which also belong to the LGPS, could benefit too, helping to meet local investment objectives.Â
LGPS employer contribution rates are set by an independent actuary and are not fixed so they vary widely.Â
They have averaged between 14 per cent and 18 per cent of employees’ pensionable pay but are much higher for some councils while there are one or two which have cut contributions significantly already.
The specific rate for a council employer is calculated every three years and can vary based on factors like investment returns and the specific employer scheme. Council employers pay a significant majority of the LGPS’s costs.
The specific rate for particular council employers is calculated every three years and can vary based on factors like investment returns and the specific employer scheme.Â
But if their scheme is in significant surplus, they should not really need to pay contributions now.
Here are some facts and figures to think about.
Average share of council tax spent on pensions: 23.5 per cent
Total spent by all councils (latest year): £6.7–7billion
Councils spending more than 50 per cent of council tax revenue on pensions: 14
Councils spending over 33 per cent of council tax on pensions: 24
Councils devoting more than 20 per cent of council tax to pensions: 60
Some councils which allocate over 50 per cent of their council tax to pensions are:
Basingstoke & Deane – 106 per cent
Orkney – 76 per cent
Cheltenham – 75 per cent
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