The Royal Borough of Kensington & Chelsea will reduce employer pension contributions to zero for 2025-26, against the advice of its officers and the scheme actuary, as it boasts a 207% funding level. The money will instead be used to help compensate those affected by the Grenfell Tower tragedy.

Having sought advice from counsel, on 4 February the investment committee voted in favour of pausing contributions from 1 April this year, despite actuaries Hymans Robertson saying they could not certify a zero employer rate.

The actuary noted that pausing employer contributions now would not be detrimental to the fund’s ability to pay pensions in future but said it was inappropriate to do so, citing regulations and reputational risk among others. Officers, including the s151 officer, advised councillors to act in line with the actuary’s advice.

“While there is clearly a mathematical case for a zero rate, it would be unprecedented to go against the actuary’s advice,” council documents state.  “There is a good chance that it would lead to intervention and legal action by [the Ministry of Housing, Communities and Local Government] and the Pensions Regulator (tPR). The outcome of that intervention is uncertain.”

The advice given to Kensington & Chelsea was to contribute 7.5% to the pension fund in 2025-26 – much lower than the average of 25.2% for councils, and just half the 15% that had been predicted for this year. Newly accrued benefits cost around 15% in addition to the employee contributions.

Market conditions are not normally considered a valid reason to change contribution rates mid-cycle. A year ago, the Local Government Pension Scheme Advisory Board told funds and employers that pension surplus did not justify reducing employer contributions, as the average funding level for LGPS funds in England and Wales had reached 107% at the 2022 valuation.   
   

 

However, funding constraints placed on local authorities over the past 15 years – with several effectively bankrupt – mean some have questioned whether cash-strapped councils should continue to build up buffers for future pension obligations towards employees while services for local taxpayers are being decimated. Kensington & Chelsea may have fired the starting gun to what could be a round of contribution reductions, even though most councils will want to wait until the results of the 2025 valuation are in.

While LGPS officers point to legal and SAB to the funding risks of reducing contributions now based on surplus, the tone from central government is very different, at least in relation to private sector schemes, where employers carry the risk. It has recently revived proposals for employers to access defined benefit surplus, in the hope this will stimulate economic growth.