Local Government Pension Scheme valuation cycles and management of employer risk

On 8 May 2019, MHCLG published a policy consultation entitled 'Local Government Pension Scheme ('LGPS'): Changes to the Local Valuation Cycle and the Management of Employer Risk'

20 May 2019

The Ministry of Housing, Communities & Local Government ('MHCLG') addresses a number of different aspects of the LGPS in the consultation document including access in the higher education sector, valuation cycles, and managing different aspects of employer exit from the LGPS (the last of which is the main focus of this briefing).

Flexibility on exit payments

Currently, where an employer in the LGPS ceases to employ an active member within a particular LGPS fund, the LGPS regulations require the fund to undertake an exit valuation, and any deficit is then payable by the employer (the position on surpluses is described further below) either immediately or over such other period as the administering authority for the fund considers reasonable.

The consultation document proposes that additional options are given to accommodate withdrawing employers, so that the range of options includes:

  • calculate and recover an exit payment as currently for employers ready and able to leave and make a clean break
  • agree a repayment schedule for an exit payment with employers who wish to leave the fund but need to be able to spread the payment
  • agree a deferred employer debt arrangement with an employer to enable them to continue paying deficit contributions without any active members where the fund is confident that the employer can fully meet its obligations.

The consultation recognises that a number of funds have reached side-agreements outside of the LGPS Regulations with withdrawing employers to provide for exit arrangements which are consistent with the above. The proposals would provide an express legislative framework for future agreements.

Exit Credits

The government has recognised that the introduction of exit credits – payable to a withdrawing employer where a surplus in the LGPS fund is attributable to them – has created certain issues, in particular in an outsourcing context. The existing exit credit regime does not take into account a common practice with outsourcings of 'pension risk pass-through', whereby the letting authority retains the majority, if not all, of the pensions risk which would otherwise pass to the contractor. Where the letting authority retains the risk, it is likely to be inappropriate for the contractor to benefit from a surplus.

The government's proposal is that the letting authority’s exposure to risk is taken into account such that, where a contractor has not borne pension risk, the exit credit could be given a £0 value. We presume that the proposal is also that where some but not all pension risk has been taken on by the contractor, fund’s would have the power to reduce an exit credit accordingly, although this aspect is not made expressly clear in the consultation document and may need clarifying. Despite the slight lack of clarity, the general proposal on exit credits would provide some much needed flexibility.

The proposal is for the change to apply retrospectively to withdrawing employers on and after 14 May 2018, which is when exit credits were introduced.

Other items

There are also proposals for LGPS fund valuations to take place on a quadrennial basis (with powers to conduct interim valuations where appropriate).

Finally, the consultation sets out proposals whereby further education corporations, sixth form college corporations and higher education corporations in England will no longer be required to offer membership of the LGPS to their non-teaching staff (albeit current active members would have a protected right to membership) which would create different treatment across the workforce.

We will be issuing further briefings as the consultation proposals develop.

Key contact

Michael Hayles

Michael Hayles Partner

  • Pensions
  • Public Sector Pension Schemes
  • Financial Services

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