Consultancy firm Isio has launched a ‘prudence watch’ for local government pension schemes, an analytical framework designed to help funds understand and compare the level of prudence built into employer contribution rates.
The launch follows the 2025 actuarial valuation of the LGPS in England and Wales, which set employer contribution rates coming into force from 1 April 2026 for the next three years. Since the previous valuation, LGPS funding levels have strengthened significantly, with Isio’s LGPS Low-Risk Funding Index showing the aggregate position remaining well above 100 per cent for much of the inter-valuation period and further improvements since.
Isio’s Prudence Watch has been developed to look at how this improved funding position has been reflected in contribution-setting. The analysis compared each fund’s contribution rate with Isio’s standardised low-risk contribution measure, intended to help employers and funds understand how much caution is being applied.
Isio’s analysis of 86 open LGPS funds in England and Wales shows that average total employer contribution rates from April 2026 are expected to be 16 per cent of payroll, with the average rates for the funds ranging from 1 per cent to 24 per cent. However, Isio estimates that the average low-risk contribution rate is 9 per cent, meaning fund contribution rates are, on average, 7 percentage points higher than Isio’s low-risk measure.
Prudence Watch also calculates a “prudence score” for each fund, assessing the level of long-term expected investment return above or below long-dated government bond yields that is implied by the fund’s contribution rate. The average Prudence Watch score is -0.6 per cent, indicating that funds are, on average, setting contribution rates that imply long-term investment returns of 0.6 percentage points below long-dated government bond yields.
Isio believes this reflects a highly cautious position, particularly given that LGPS funds typically continue to hold long-term growth assets.
Katy Taylor, director of public services at Isio, says: “Prudence remains an essential part of responsible pension funding. It helps protect members, employers and taxpayers from future uncertainty. But our analysis shows that, even after recent reductions, contribution rates for most funds remain materially above the low-risk benchmark we have calculated for each fund.”
Isio’s analysis also showed that contribution-setting approaches vary significantly across the LGPS. There is no clear link between discount rate assumptions and the level of contributions being paid, suggesting that prudence can sit in different parts of the valuation process, including how quickly employers are allowed to access surpluses.