20 May 2019

The Ministry of Housing, Communities and Local Government (MHCLG) has published a consultation containing a number of important proposals relating to the Local Government Pension Scheme (LGPS) in England and Wales, the general theme of which is to reduce some of the angst employers feel in relation to the LGPS (and in less exciting news, to increase the valuation cycle to four years). 

The consultation closes on 31 July 2019.

Leaving the LGPS: exit payments 

At present, when the last active member of an employer leaves the LGPS, the employer must pay a one-off lump sum exit payment calculated on a full cessation basis where the relevant LGPS fund is in deficit. The consultation puts forward two alternatives to ease the effect on departing employers.

Introducing ‘deferred employers’ 

This would allow funds to agree to defer the recovery of an exit payment from departing employers in return for a commitment from the employer to continue to meet its existing liabilities on an ongoing basis, including following an updated funding assessment at each valuation. This new regime is based on the deferred debt regime introduced for private sector schemes on 6 April 2018. 

To enter into a deferred employer debt arrangement, the LGPS fund would need to be satisfied that the departing employer has a sufficiently strong covenant not to place the fund under undue risk. The MHCLG stresses that it would expect administering authorities to offer deferred employer debt arrangements "when this is in the interests of the other fund employers and where there is not expected to be a significant weakening of the employer covenant within the coming 12 months". 

The deferred arrangement would terminate in specific circumstances, for example if a “relevant event” (such as insolvency or voluntary winding up) were to occur and the deferred employer's covenant has significantly deteriorated.

Exit payment repayment plans 

This proposal would allow departing employers to spread the payment of their exit payment over a period agreed with the administering authority. It could be of use where an administering authority does not feel that granting "deemed employer" status would be appropriate but that some level of flexibility would be in the interests of the fund and the other employers. The MHCLG is asking whether there should be a maximum repayment period stipulated in the legislation.

In truth, both of these practices are being deployed by administering authorities in different funds (often with security being required as part of the deal, for example, a charge over assets) but the MHCLG feels that this should be put on a firm legislative footing. 

Leaving the LGPS: exit credits

"Exit credits" were introduced in May 2018, as a counterbalance to the levying of exit payments. If the relevant LGPS fund is in surplus, a payment can be made to scheme employers at the time their last active member leaves the scheme. However, this has led to unforeseen consequences in cases where a LGPS employer has outsourced a service or function to a service provider and shared the risk of pension costs with the service provider (variously referred to as cap and collar, full pass-through or other types of arrangements). 

When the contract ceases, the service provider's liabilities may be over-funded on the cessation basis and it is entitled to an exit credit, even though the LGPS employer has borne some, or all, of the costs and the risk in relation to the service provider’s liabilities throughout the life of the contract. To remedy this situation, the consultation proposes a new requirement that an administering authority must satisfy itself whether risk sharing between the contracting employer and the service provider has taken place. If the administering authority is satisfied that the service provider has not borne any risk, the exit credit could be calculated as nil. 

This change would be retrospective, applying to all scheme employers who exit the LGPS on or after 14 May 2018. If there is a dispute or disagreement on the level of risk a service provider has borne, the appeals and adjudication provisions contained in the LGPS Regulations 2013 would apply.

As we mentioned in a previous update, the Government is consulting on the introduction of a new way for service providers to participate in the LGPS, the "deemed employer" approach. The MHCLG points out that, if adopted, this approach would also prevent exit credits becoming payable to service providers where they have not borne contribution or funding risks.

Employers required to offer LGPS membership

Currently, further education corporations, sixth form college corporations and higher education corporations in England and Wales are required to offer membership of the LGPS to their non-teaching staff. The consultation includes proposals to remove this requirement in respect of new employees. These institutions would have the option to offer access to the LGPS to all, or some, eligible new employees. 

Individuals already in employment with a further education, sixth form college or a higher education corporation in England and who are eligible to be a member of the LGPS before the changes come into force have a protected right to membership of the scheme, for so long as they remain in continuous employment with the body employing them at the time the changes come into force. They would also retain an entitlement to membership following a compulsory transfer to a successor body, for example, following the merger of two corporations. 

It would be up to each institution to consider the potential equalities impacts when making their decision on which, if any, new employees should be given access to the scheme. 

In Wales, further and higher education policy is devolved. At the moment, the Welsh Government does not propose to make the same changes in relation to further education corporations and higher education corporations so these institutions will continue to be required to offer membership of the LGPS to their non-teaching staff. 

Our comment

Employers who are participating, or expecting to participate, in the LGPS should watch these developments carefully and consider how they will be impacted. Of most interest will be the proposals for mitigating the cliff edge of a one-off exit payment; smaller employers in particular may feel the benefits of these changes although it will depend on the approach which individual LGPS funds take in practice.