Why a London council can afford to give its workers a pension 'year off'

One London council has made the decision not to pay into its workers pensions for a year, due to huge surplus. Kensington & Chelsea council has given members of its £2bn pension scheme a year's payment holiday, although its actuary, Hymans Robertson, has criticised the decision for setting a 'dangerous precedent'.

Workers will still get the same pension as the scheme is a final salary scheme which guarantees to pay a set amount when someone retires.

Normally the council pays 15% of an employee's salary into their pension; said the pause would also help it save £9m to put towards the reserves, which is intended to meet the council's financial commitments around the disaster which happened in 2017.

The so-called zero employer contribution rate for the 2025-26 financial year was agreed in February by the pension fund's investment committee.

Kensington & Chelsea's pension fund is part of the Local Government Pension Scheme (LGPS) which includes 90 other local authorities, all the schemes are run on a defined benefit basis which means people are guaranteed a pension which is a percentage of their final salary, when they retire.

Kensington's pension has a huge surplus which means that after its liabilities, which include a guarantee to pay pensions on a percentage of someon's leaving salary, it still has enough to give staff a contribution holiday.

But Hymans Robertson said while the scheme could easily afford to give staff the holiday it was concerned that the zero rate in 2025/26 could lead to expectations that this is a sustainable rate in the long term.

Michael Hayles, partner in the pensions team at law firm Burges Salmon said:"Hymans had recommended a reduced contribution rate of 7.5% of pensionable pay, half of the original 15% rate set for 2025-26, following the fund's 2022 valuation.

"However, the investment committee argued that reducing the contribution rate to zero would not have any detrimental effect on the ability of the Fund to meet benefits, citing the strong funding position.

"Hymans agreed with the premise that the nil rate for a year would not materially affect funding levels, but advised, nonetheless, that it would be inappropriate for the actuary to certify the zero rate."

According to a spokesperson from Kensington and Chelsea Council, the reduction was possible due to the "very strong performance of the pension fund over several years".

They said the pension fund's funding level has increased from 155% in 2022 to 207% in 2024, with £2bn of assets under management.

The spokesperson from Kensington and Chelsea Council continued: "As a defined benefit scheme, the decision to reduce employer contributions will have no impact on the final local government pension for staff. The council faces significant financial challenges over the next few years, and this decision by the investment committee will help to address these challenges."