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Public Sector Pensions Speedbrief: LGPS: changes to valuations, exit terms and membership

  • United Kingdom
  • Pensions - Public sector

22-05-2019

Just over a month after the closing date for its consultation on the implementation of new Fair Deal within the Local Government Pension Scheme (LGPS), the Ministry of Housing, Communities and Local Government (MHCLG) has released another consultation on a separate set of changes to the LGPS.

This latest consultation deals with a loosely interlinked suite of issues relating to valuation cycles, exit payments / credits, and whether employers within the higher and further education sector in England should continue to be obliged to offer LGPS membership to non-teaching staff.

Fund valuations to change from 3-year to 4-year cycle

As a locally administered, funded public service pension scheme, the LGPS is subject to two main sets of valuations: one conducted by the Government Actuary’s Department at national level, and the other conducted by fund actuaries at local fund level.

The Government has already brought the national LGPS valuation in line with that of other public service pension schemes by moving it to a 4-yearly (quadrennial) cycle, such that the next whole-scheme valuation will be in 2020. The main driver for this change was to provide consistency and to allow decisions to be made holistically in respect of all public service schemes.

MHCLG’s recommendation is that the 4-year valuation cycle should be extended to all local LGPS fund valuations, either by:

  • postponing the next fund valuations after the 2019 valuations (already in progress) to 31 March 2024, or
  • having an additional ‘one-off’ valuation as at 31 March 2022, covering a 2-year period to 31 March 2024.

In part, the purpose of this change would be simply to keep the local and national valuation cycles aligned for ease of administration. The consultation paper also suggests that a longer valuation cycle would produce greater stability in employer contribution rates and save costs.

Equally, however, a longer valuation cycle could potentially result in greater changes in employer contribution rates at each valuation (since it will take longer for inter-valuation events and experience to feed into the contribution rate). A 4-year valuation period could also reduce levels of risk and cost monitoring.

To counter these concerns, MHCLG is proposing various mitigation measures, including:

  • Allowing funds to conduct an interim valuation (with some flexibility as to the degree of actuarial advice required, depending on the circumstances) when certain conditions, to be set out in the authority’s Funding Strategy Statement, are satisfied.
  • Enabling the Secretary of State to require an interim valuation of a fund (including in response to representations from an employer, or from the fund itself in exceptional circumstances not catered for by the conditions in its Funding Strategy Statement).
  • Allowing funds to amend contribution rates in between valuations in certain circumstances, again to be set out in the Funding Strategy Statement. This power is likely to be used predominantly in respect of ‘riskier’ employers, such as admission bodies. An employer will also be allowed to request a reassessment of its rate (but will need to meet the associated costs).

Since an interim valuation would be a valuation of the whole fund (and therefore not something to be undertaken lightly), the consultation paper also proposes additional restrictions, including the need for the administering authority to consult their Local Pension Board and actuary before deciding to proceed, and to notify MHCLG of the reasons for the interim valuation and the conclusions reached.

The Scheme Advisory Board will be invited to provide guidance to funds on the matters to be included in their Funding Strategy Statements in relation to the new powers to conduct interim valuations or review employer contribution rates mid-cycle.

Exit payments

MHCLG proposes to enable funds to be more flexible in relation to the collection of exit payments from employers, by permitting exiting employers to:

  • spread exit payments over a longer period; or
  • defer making the exit payment in return for an ongoing commitment to meet their existing liabilities as if they were still an employer of active members (deferred employer status).

While the spreading of exit payments is technically already possible by agreement, MHCLG is proposing to adopt the model used by the Scottish Public Pensions Agency in its equivalent to reg.64(4) of the LGPS Regulations, which involves adjusting the exiting employer’s contributions before exit to enable the payment to be made by the expected exit date “or over such period of time thereafter as the administering authority considers reasonable”. MHCLG is seeking input on whether further protections may be needed in respect of this, such as a maximum time-limit for payment.

As for deferred employer status, this would be modelled very closely on the deferred debt arrangement concept recently introduced for management of section 75 debts in private sector defined benefit schemes – so, for example, there is an expectation that a deferred employer debt arrangement in LGPS will only be used where the fund does not foresee any material weakening of the employer covenant within the next 12 months. The LGPS Regulations would be amended to provide for the key obligations and entitlements under such an arrangement, with statutory guidance and guidance from the Scheme Advisory Board fleshing out further details.

Exit credits

These were introduced in May 2018, but unforeseen issues have since arisen in relation to the interaction of the new provisions with existing outsourcing arrangements entered into on a “pass-through” basis. Such agreements will commonly involve the outsourcing authority subsidising all or part of the contractor’s LGPS contributions during the period of the contract, and also taking on liability for any deficit at the point of exit. However, because exit credits were not permitted by the LGPS Regulations at the time these arrangements were negotiated, the outsourcing agreement will make no reference to what happens if the contractor’s notional fund is in surplus at the exit date. The net result is that the contractor may be entitled to claim a substantial exit credit, even though it has borne no pensions risk during the contract and in some cases even though the surplus does not derive from contributions paid by the contractor.

MHCLG is now proposing to amend the 2013 Regulations retrospectively to address this issue, by requiring an administering authority to take into account a scheme employer’s exposure to risk when calculating the value of an exit credit. In particular, if the service provider has not borne any pensions risk, but has become entitled to an exit credit, MHCLG considers that the exit credit should be assessed as nil.

As an aside, the consultation paper also notes that the new deemed employer method of participation in the LGPS which was proposed in the recent New Fair Deal consultation would prevent exit credits being payable to service providers who have not borne any risk (for more information, see our speedbrief on that consultation here). However, these changes still remain proposals at present.

Eligibility for FE and HE support staff

Finally, the consultation paper proposes removing the obligation on higher and further education corporations in England to offer new non-teaching staff access to the LGPS. This proposal has been driven by various changes within the sector, including the facts that institutions in this sector are now officially categorised as non-public sector, are increasingly autonomous, and also that FE institutions and sixth form colleges can now legally become insolvent.

Access to the LGPS would still be available for the purposes of recruitment and retention, but the decision whether to offer membership to a new employee would become a matter for each individual employer. Those already in employment, however, would retain their protected right to membership of the LGPS for as long as they remain in continuous employment (including following a TUPE transfer).

The Welsh Government is not currently proposing to make equivalent changes in respect of the FE and HE sector in Wales, so these proposed changes would be limited to English institutions.

Comment

While it may seem pragmatic to bring LGPS fund valuations into line with other public sector valuations, the difficulty is the funded status of the LGPS, and therefore the need for regular monitoring and reassessment of the funding position and employer covenant strength. MHCLG acknowledges that there are risks to widening the gap between assessments, but suggests that the costs savings involved will more than pay for any mitigation required to alleviate those risks.

It seems that what was one triennial valuation could now be replaced with one or more interim valuations over a four-year period, on top of the quadrennial valuation. The ad hoc nature of an interim valuation may, however, mean that such a valuation is proportionately more costly to complete, since (for example) data will need to be collected ‘out-of-cycle’ (though the flexibility hinted at in the consultation paper around the degree of actuarial advice required may help keep costs manageable).

In relation to the proposals to allow spreading of exit payments, as MHCLG rightly points out, most funds already raise contribution rates when they anticipate an employer is on course to exit the fund, and if there is still a deficit at the exit date, the definition of an “exit payment” in the LGPS Regulations 2013 expressly refers to the amount due being paid “over such period of time as the administering authority considers reasonable” and therefore already provides the flexibility which MHCLG seems to think is missing from the legislation. It is therefore difficult to see why any change to the LGPS Regulations is thought to be needed.

In contrast, the introduction of deferred employer status will go some way to filling a genuine need. There are many smaller charitable and not-for-profit entities participating in the LGPS for historical reasons (what would previously have been categorised as ‘community admission bodies’) who are trapped in a situation where they can neither afford to cease participation nor to continue accruing liabilities. Administering authorities have often been sympathetic to the position of these employers but are quite materially hamstrung in their ability to put in place suitable arrangements to enable cessation of accrual, owing to the inflexible wording of the current exit payment regulations. Whilst the deferred debt arrangement model adopted in the private sector is by no means perfect, it provides a better route towards solving these problems than the LGPS Regulations currently afford. This proposal is therefore likely to be welcomed.

As for exit credits, having been in place for almost a year, they are still a source of confusion and dispute for funds and employers alike. It is therefore helpful to have clarification of the policy intent around exit credits, and in particular the acknowledgment that an exit credit should not be payable to a service provider where the outsourcing authority has borne all the contribution or funding risk during the contract. However, the retrospective introduction of these changes is likely to be fiercely resisted by outgoing service providers who, as the regulations currently stand, may be legally entitled to substantial payments.

Finally, the development in respect of HE and FE is interesting. It seems likely that MHCLG here is bowing to demand from employers, undoubtedly driven by the need to save costs, amid recurrent arguments over the adequacy of Government funding for this sector. The increasing costs of the Teachers’ Pension Scheme (TPS) are likely to be a factor in this development, with many HE and FE institutions potentially looking to reduce support staff costs in order to offset the costs of TPS provision. However, it is likely that this aspect of MHCLG’s proposals – or at least the attempted use of the new flexibility by relevant employers in practice – will face significant challenge by the unions. Interestingly, the TPS has suggested a similar proposal for independent schools (although not for HE or FE institutions).

The consultation closes on 31 July 2019. Eversheds Sutherland will be submitting a full response to the consultation.

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