The Government has now published a further partial response to its consultation paper Local government pension scheme: changes to the local valuation cycle and management of employer risk. The consultation ran earlier in the summer, and regulations have now been published, which should come into force later this month.
The consultation paper had considered a number of new tools which LGPS funds could deploy to manage exit payments (deficit payments on employer exit) or to retain employers as "deferred employers" when they cease to employ active members (the employers stay on funding risk and fund liabilities over time).
It is clear from the consultation response document that respondents considered these tools are necessary given current circumstances, and the strain that COVID-19 is bringing to LGPS employers.
The very positive news is these new tools are being brought forward in legislation. Key points from the Government response are:
- LGPS funds should have new powers to review employer contributions (outside of the typical funding cycle) to adapt to changing circumstances;
- LGPS funds would have greater flexibility on the repayment terms for exit payments; and
- LGPS funds would (as an alternative to an exit payment being made) be able to enter into deferred debt arrangements.
Reviewing employer contributions
Regulations will be amended such that:
- Administering authorities ("AAs") may review the contributions of an employer where there has been a significant change to its pension liabilities;
- AAs may review the contributions of an employer where there has been a significant change in the employer's covenant; and
- An employer may request a review of contributions.
AAs will be required to consult with the employer when undertaking a review of the employer's contributions. Each LGPS fund's Funding Strategy Statement ("FSS") will need to state its policy on the review of employer contributions.
The expectation is that reviews would be based on covenant change as opposed to market movements.
Regulations will consolidate an AA's power to spread the repayment of exit payments over time.
Again, each AA's approach should be set out in the FSS and advice from the actuary would be required. AA's will be expected to determine whether to spread an exit payment, over what period and the proportion of the exit payment to be paid each year, taking account of the interests of all employers and the funds as a whole.
Deferred debt arrangements
Significantly, Government will introduce "deferred employer" status and a structure for "deferred debt arrangements" ("DDAs") in the LGPS. The exiting employer's responsibilities under a DDA will be the same as for employers of active members but excluding the requirement to pay primary contributions (meaning the cost of future accrual).
Each AA would again need to set out in its FSS its policy on when a DDA would be entered into.
The expectation is that AA's consider all the evidence available and use judgment before allowing a DDA and to monitor the arrangement and the covenant of the deferred employer.
Once the new regulations are digested, we would anticipate this will lead to an increase in the number of employers (especially those in the not-for-profit sector, or employers not bound by law to provide the LGPS) closing the LGPS to future accrual for employees - as a managed exit will be easier to facilitate.
The government said this would “enable administering authorities to respond to the full range of circumstances which may change between valuations, including potential impacts of Covid-19 and some other circumstances for example when local government reorganisation leads to a change in liabilities.”