Independent report

Local Government Pension Scheme (Scotland) Section 13 report as at 31 March 2023 - executive summary

Published 16 September 2025

Executive Summary

1.1 The Government Actuary has been appointed by Scottish Ministers to report under section 13 of the Public Service Pensions Act 2013, in connection with the 2023 actuarial valuations of the Local Government Pension Scheme Scotland (“LGPS Scotland” or “the scheme”). The Scottish Public Pensions Agency (“SPPA”) provides oversight to the scheme and also maintains guidance and regulations.

1.2 Section 13 requires the Government Actuary to report on whether the following aims are achieved:

• Compliance
• Consistency
• Solvency
• Long term cost efficiency

1.3 This is the third formal section 13 report. Section 13 was applied for the first time to the fund valuations as at 31 March 2017 and a second exercise was undertaken as at 31 March 2020.

1.4 This report is based on the actuarial valuations of the funds, other data provided by the funds and their actuaries, and engagement exercises with relevant funds. We are grateful to all stakeholders for their assistance in preparing this report. We are committed to preparing a section 13 report that makes practical recommendations to advance the aims listed above.

We will continue to work with stakeholders to advance these aims and expect that our approach to section 13 will continue to evolve to reflect ever changing circumstances and feedback received.

Progress since 2020

1.5 We made two recommendations as part of our 2020 section 13 report. We recommended that:

1. SPPA should consider the content of standardised information and where it should be published, to enable stakeholders to access and compare funds accordingly.

2. SPPA should engage with funds and other stakeholders to consider the impact of inconsistency. It should continue to consider whether a consistent approach needs to be adopted when assessing the impact of emerging issues.

1.6 We are pleased to note good progress was made in relation to both these recommendations. We especially wish to recognise the enhanced “dashboard” disclosures that all funds provided as part of their valuation reporting, as agreed in response to recommendation 1.

1.7 We do however note that changes in the economic environment between the 2020 and 2023 valuations have led to greater divergence between the methods used by the different firms of fund actuaries. This has caused new challenges from a consistency perspective and is discussed in more detail below.

1.8 Our 2020 report also included a general risk comment. This highlighted that funding available to local authority employers might not keep pace with the growth of pension funds over time. This leads to a general risk that future funding volatility could have a more profound effect on scheme employers. We understand from discussions with stakeholders that funds are mindful of these risks, linked with a future deterioration in funding levels, and actively consider this as part of the resilience built into their funding strategies.

Funding position at 2023

1.9 Following the 2020 valuations we reported that LGPS Scotland appeared to be in a healthy funding position. Since that date, the aggregate funding position of the scheme has improved markedly. We are therefore happy to report that that the scheme now appears to be in a very strong financial position, specifically:

• Total assets have grown from £46bn in 2020 to £60bn in 2023 (taking the value used in the local fund valuations).
• Total liabilities disclosed in the 2023 local valuation reports amounted to £42.5bn. The local funding bases are required to incorporate prudence (i.e. there is intended to be a greater than 50:50 likelihood of actual future experience being better than the assumptions, in the opinion of the fund actuary). We note that this aggregate position reflects a variety of different methods used by each individual fund (please see the consistency section below for further details).
• The aggregate funding level on these prudent local bases has improved from 104% (at 2020) to 141% (at 2023). The very large increase reflects a combination of factors. The primary drivers are stronger than expected investment returns through the inter-valuation period, and changes to the financial assumptions used for the 2023 valuations (reflecting economic and market conditions at the valuation date). Funding level changes have varied between individual funds. This is discussed in more detail below.
• All twelve funds are now in surplus at 31 March 2023. This is an improvement from the 2020 valuations, when four funds were in deficit on the local funding basis. We note that overall, there is one less fund than at the previous review, as a result of the merger of the Aberdeen City Council Transport Fund and the North East Scotland Pension Fund.
• The aggregate funding level on the Government Actuary’s Department’s (GAD’s) best estimate basis is 152% (at 2023). GAD’s best estimate basis is the set of assumptions derived by GAD without allowance for prudence. There is intended to be a 50:50 likelihood of actual future experience being better or worse than the best estimate assumptions, in our opinion. More information on this basis is set out in Appendix F.
• At the date of writing, it is likely that funds will have seen some further improvements in their funding positions. However, this will depend on individual fund circumstances and the valuation methodology adopted.
• Investment conditions currently remain volatile, and so it is possible further changes will emerge ahead of the 2026 valuations.

1.10 We set out below our findings on each of the four aims and our recommendations.

Compliance

1.11 Our review indicated that fund valuations were compliant with relevant regulations.

Consistency

1.12 Section 13 requires each fund’s valuation to be carried out in a way that is not inconsistent with other LGPS Scotland fund valuations. We interpret “not inconsistent” to mean that methodologies and assumptions used, in conjunction with adequate disclosure in valuation reports, should facilitate comparison by a reader of the reports. This is important to enable readers to draw comparisons between the results from two valuation reports and also has wider benefits.

1.13 Local circumstances may merit different assumptions. For example, financial assumptions are affected by the current and future planned investment strategy, and different financial circumstances might lead to different levels of prudence being adopted.

1.14 Further to our recommendation in the last section 13 report, we are pleased to note all funds have incorporated the valuation “dashboard” into their formal valuation report. Funds have also updated the dashboard to reflect the additional information suggested following that previous exercise. We consider this a useful resource to aid stakeholders’ understanding, because information is then shown in a consistent way. We believe this change has helped improve presentational consistency.

1.15 The impact of stabilisation mechanisms is discussed in chapter 7 and references presentational consistency.

1.16 There does not appear to have been material improvements in evidential consistency between funds since the 2020 section 13 review. In fact, the economic climate at the time of the 2023 valuations has resulted in further divergence between the approaches adopted by different actuarial advisors.

1.17 Chapter 5 highlights that changes in the local funding levels disclosed by funds at the 2020 and 2023 valuations can vary significantly, even where funds have had relatively similar experience. This is due to the way that different actuarial advisors incorporate prudence and stability into their approaches. When interpreting the local funding level of any particular fund, it is therefore critical to understand the method and assumptions being adopted for that assessment. We note that whilst an actuarial firm will make recommendations on how to approach a fund’s valuation, it is ultimately the funds themselves who are responsible for determining the funding strategy, having regard to their stakeholders’ views.

1.18 The discount rate is the most significant assumption in terms of impact on the valuation results. It is differences in this rate which are primarily driving the outcomes noted above. In addition to variation in the rates used between each of the actuarial advisors, we also see variation between the rates used by different funds advised by the same actuarial advisor. The firm which advises multiple funds, Hymans Robertson, have provided us with explanations for this variation. The discount rates chosen by their funds vary because of three factors: the fund’s investment strategy, their selected levels of prudence, and in two cases additional fund-specific factors.

Recommendation 1:

We recommend that the SPPA continue to engage with scheme stakeholders to assess how greater consistency could be achieved to allow easier comparison between funds and better understanding of risks.

1.19 We are grateful to the fund actuaries and SPPA for engaging on climate risk analysis since the previous review. We believe that the climate risk analysis principles document agreed ahead of the 2023 valuations (see Appendix B) helped to improve consistency across the scheme in this area. We recognise the significant progress made by funds and actuarial advisors in the presentation of climate risk analysis as part of the actuarial valuation process. We strongly promote the further development of climate risk analysis and its integration into decision-making by funds. This remains a rapidly evolving area and we recommend that the SPPA considers with other stakeholders what common principles should be adopted for the 2026 fund valuations to facilitate consistency in climate risk analysis across the scheme.

1.20 The landscape in which the scheme operates is continually changing such that the scheme will face different challenges over time. We support SPPA’s efforts continuing to proactively engage with stakeholders on such issues and provide guidance where appropriate to ensure greater consistency across funds.

Recommendation 2:

We recommend that the SPPA continue to consider emerging issues and, where appropriate, whether guidance would be helpful to support greater consistency.

As part of greater consistency on climate risk, we recommend that work continues to refine the climate change principles document in advance of the 2026 fund valuations.

Solvency

Under solvency and long term cost efficiency we have designed a number of metrics and raised flag against these metrics, to highlight areas where risk may be present, or further investigation is required, using a red/amber/green rating approach. Where w do not expect specific action, we have maintained the white “for information” flag approach introduced in 2020.

1.21 As currently set out in the relevant Chartered Institute of Public Finance & Accountancy (“CIPFA”)’s Funding Strategy Statement Guidance, the employer contribution rate is appropriate to ensure solvency if:

• the rate of employer contributions is set to target a funding level for the whole fund of 100% over an appropriate time period and using appropriate actuarial assumptions

and either:

• employers collectively have the financial capacity to increase employer contributions, should future circumstances require, in order to continue to target a funding level of 100%

or

• there is an appropriate plan in place should there be an expectation of a future reduction in the number of fund employers, or a material reduction in the capacity of fund employers to increase contributions as might be needed

1.22 Given the very strong funding position of the scheme, and its constituent funds, there are no immediate solvency concerns. However, risks clearly do remain and are important for funds to continue to consider. This is particularly notable in the context of competing pressures on employer budgets and noting the sensitivity of funding levels to future experience (especially investment market conditions).

Long term cost efficiency

1.23 As currently set out in CIPFA’s Funding Strategy Statement Guidance, we consider that the rate of employer contributions has been set at an appropriate level to ensure long term cost efficiency, if it is sufficient to make provision for the cost of current benefit accrual, with an appropriate adjustment to that rate for any surplus or deficit in the fund.

1.24 Given the healthy funding position of the LGPS Scotland funds, we have not raised any flags in relation to our long term cost efficiency metrics. Whilst most individual employers are now also in surplus, deficit considerations remain relevant for some. It is also important to remain conscious of risks associated with potential future changes to the scheme’s funding position.

1.25 Surplus usage is becoming an increasingly important aspect of the valuations. We acknowledge there are different approaches to the utilisation of surpluses and funds should consider relevant factors and the trade-off between competing priorities.

1.26 Funds appear to have made decisions having considered relevant factors. We have not flagged any funds in relation to surplus usage at this review. However, we note inconsistencies in outcomes will arise where funds place different weights on relevant factors. Chapter 7 highlights the notable variations that we have identified between individual funds’ approaches to stability and prudence in their use of surplus.

1.27 A key difference in the funding strategies relates to the use of stability mechanisms, surplus buffers, and asset volatility reserves. Differences in approach can have a material impact on the outcome of the valuations.

1.28 We therefore believe further clarity on the choice of stability structures, their parameterisation, and the impact of that mechanism on contribution rates would be helpful. The underlying reasons for these choices were also not always very clear from valuation reports. We believe transparency and public documentation of funds’ decision-making processes, and rationales, is important. This will enhance transparency and will allow stakeholders to more easily compare between funds. It will also aid future section 13 exercises.

1.29 Many funds reported a high probability that the assets held at the valuation date, allowing for expected future investment returns, would be sufficient to meet the accrued liabilities of the fund. It is important intergenerational equity is considered as part of funding decisions, in particular the balance between the interests of current and future taxpayers and employers.

1.30 Chapter 7 provides details of how we plan to analyse long term cost efficiency at future valuations. This explains that we will adopt a flagging approach in relation to surplus usage as part of those exercises.

1.31 This approach will be a mix of qualitative and quantitative analysis, to reflect the range of relevant considerations and approaches. We will expect administering authorities to have considered relevant factors and the trade-off between competing priorities.

1.32 From an intergenerational fairness perspective, we will highlight those funds which could be seen as retaining too large surpluses and not recognising their strong funding positions in their employers’ contribution rates. Conversely, we will use our surplus retention metric to identify any funds where larger contribution reductions, in respect of surplus, could lead to too great a risk in the short- to medium-term.

1.33 We will also provide general commentary on the overall expected evolution of the aggregate scheme’s funding position over time.

Recommendation 3:

We recommend that ahead of the 2026 valuations SPPA consider whether additional guidance is required to:

• support funds in balancing the different surplus considerations when setting contribution rates.

• assist funds in enhancing the transparency and documentation of decisions relating to surplus usage, in particular on the balance between solvency and intergenerational fairness.