The proposed changes to the LGPS: local valuation cycles and exits
0The Ministry of Housing, Communities and Local Government (MHCLG) recently issued a consultation on proposals to amend the Local Government Pension Scheme (LGPS). Barry Mckay looks at the potential implications.
The consultation makes proposals in five different areas; the frequency of local funding valuations, interim valuations, exit payments, exit credits and higher & further education membership of the LGPS.
Proposal 1: Move to quadrennial valuations
The consultation proposes that local valuations occur every four years – a move from the current frequency of triennial valuations.
This would bring the LGPS local valuation into line with the other unfunded public service pension schemes.
The aims of the quadrennial valuation cycle are efficiency, greater stability of contribution rates and cost savings.
It is unclear how these aims will be achieved given fund actuaries already have the tools to achieve employer contribution stability and have done so for many years.
A fund will save one valuation fee every 12 years!
And this saving assumes no interim valuations are needed (see below)!
Key concerns are a reduction (perceived or otherwise) in the level of monitoring, particularly as the number of employers in the LGPS continues to increase (currently over 15,000).
Some participate in the scheme for a relatively short period of time (some for even shorter than four years!).
Further, in relation to employer accounting and the recent higher scrutiny, it’s unlikely auditors will be comfortable with a starting point that is four years old.
Proposal 2: Ability to carry out interim valuations
A four-year cycle can expose funds to potential risks of a greater change in assets and/or liabilities, resulting in greater changes in employer contribution rates.
The unfunded public sector schemes fell victim of this following the latest quadrennial valuation.
Fortunately, MHCLG has tried to mitigate these risks introducing a concept of allowing funding positions and contributions rates to be reviewed in the interim under agreed circumstances (subject to a number of conditions which would need to be considered carefully).
Flexibility to carry out interim valuations, regardless of whether the valuation cycle is changed, is “a nice to have” to help funds manage employer risk, but becomes essential if there was a move to a quadrennial cycle.
It is important to review and amend contribution rates for some scheme employers and many admitted bodies more frequently, given the different funding strategies, to ensure good governance.
The current regulations makes it difficult to change contribution rates outside of the triennial valuation cycle.
Allowing more flexibility in the regulations to review contribution rates is something we have been championing for a long time.
Proposal 3: Allow more flexibility for exiting employers
The consultation proposes that scheme employers that are leaving the LGPS and triggering an exit payment could be allowed to spread the exit payment over a period of time, addressing the issue of “too expensive to stay in, too expensive to get out”.
The proposal will allow employers to defer making any payment and be treated as an ongoing employer if there is an ongoing commitment to meet existing liabilities.
Currently, it is common for funds to determine and request the exit payment from the exiting employer as a single payment shortly after the exit date.
Funds and their advisers may welcome the increased flexibility.
However, it’s important there are no unintended consequences.
Funds will still need to ensure that other employers are protected and under what circumstances it is in the best interests of the Fund to apply any flexibility.
Proposal 4: When should an exit payment be made to a ceasing employer
Since exit credits were introduced in the amendments made to the LGPS Regulations 2013 from 14 May 2018 they have introduced a number of unforeseen complexities that this consultation proposes to deal with.
This should be considered together with the Fair Deal consultation which suggests use of the deemed employer approach, where new employers can participate in the Scheme on a pass-through basis.
In this case the ceding employer is a deemed employer, who would retain responsibility for the liabilities.
This would make it easier to demonstrate that the scheme employer had no exposure to risk and so would it would seem fair that no exit credit is paid.
The consultation proposes that this change would be retrospective to 14 May 2018, which creates issues for funds who have already paid out an exit credit to employers who may fall into this category.
It will not be easy (if even possible) for funds to receive a refund.
Proposal 5: Relax requirements on LGPS membership for colleges
The consultation proposes further and higher education employers can stop offering LGPS membership to new non-teaching staff.
Combined with the proposed additional flexibilities around managing exit payments, it is becoming easier for colleges to manage their financial risk exposure to the LGPS and control costs.
As many of these employers are categorised as Tier 3 employers, they could be exposed to a significant cessation debt if their participation in the scheme ended.
As mentioned above, the recent problem for some has been that they can’t afford to stay in but they also can’t afford to leave.
This proposal is likely to receive a range of responses depending on the stakeholder.
If it does go ahead it will need to be carefully managed.
Future college mergers may also become more difficult where one party offers LGPS membership and the other does not.
Please note that this proposal is only for employers in England at this stage.
The consultation closes on 31 July 2019 and I would encourage you to consider some of the issues and respond.
Barry Mckay is partner and actuary at pensions consultancy Barnett Waddingham
