The Ministry of Housing, Communities and Local Government (MHCLG) and the Department for Education (DfE) asked the Government Actuary's Department (GAD) to review the treatment of academies within the Local Government Pension Scheme (LGPS). GAD has now released a report setting out its findings based on valuation data as at 31 March 2016. A copy of the report can be found here.
GAD's report makes the following key findings:
- academies are paying an average total contribution rate of 21% compared to a rate of 23% for local authorities (LAs) (LA rates are used for local authority schools)
- notwithstanding that academies currently pay on average 2% of payroll less in contributions, academies are 11% worse funded on average than LAs (73% versus 84%, respectively)
- both academies and LAs have a wide range of individual funding levels and contribution rates, and
- on the whole, academies are treated consistently with LAs with regard to valuation funding assumptions (presumably as a result of the DfE guarantee being recognised by funds).
When looking at the range of standard contribution rates for academies (that is, contributions for the future accrual of pension benefits) within each fund against the corresponding LA average, despite the wide range of funding levels (some academies have funding levels below 25% whilst others have above 100%), the standard contribution rate for an academy at the 2016 valuation is 17% of pay, which is the same as the LA average.
There are however big variations in total contribution rates, which include the contributions paid to clear deficits that have arisen in relation to pensions that have already accrued. Some academies are contributing in excess of 40% of pay, whilst others pay less than 10%. Nonetheless, total contribution rates also vary significantly between different LAs and some LAs pay considerably more than the academies within their funds.
There are a number of factors that contribute to the variations in contribution rates including:
- the amount of assets (and therefore the size of the deficit) allocated to the academy on creation
- the membership profile (academies will have a larger proportion of active members to deferred and pensioner members than LAs and the LA data includes all local government staff, not just educational staff), and
- investment performance/asset pooling arrangements.
It is also worth noting that some LAs may be voluntarily paying higher lump sum payments, which could materially affect any comparisons and there is always the potential for inaccuracies within the data that has been provided to GAD.
Whilst the majority of the funds saw an improvement in funding levels (79 out of 91), with just 12 funds seeing no improvement or a deterioration, GAD has indicated that the material variations in contribution rates nationwide are expected to continue and could potentially increase further in the future if there is a large increase in the number of academies.
What this means for academies
The review follows a report by PwC in May 2017 that was commissioned by the LGPS Scheme Advisory Board around existing pension arrangements for academies. GAD's findings give support to some of the concerns raised in that report by various academies about the cost of pension provision. In some funds, contributions seem to be considerably higher than in others and therefore it is effectively a postcode lottery with regards to the cost of pension provision in the LGPS for schools converting to academies and employing staff with access to the LGPS.
Whilst the report does not make any recommendations, it does suggest that DfE and MHCLG consider what changes to academy pension arrangements within the LGPS might be appropriate to reduce the volatility in academy contribution rates (against LA rates and other academies).
If you would like to discuss further the implications of GAD's analysis, please contact your usual pensions team contact.
