An important judgment was released yesterday in relation to surplus payments from the LGPS. The case of EMS v Secretary of State for the Ministry of Housing, Communities and Local Government (MHCLG) relates to the introduction in May 2018 of the concept of “exit credits” – meaning surplus payments to an employer on leaving the LGPS. When the concept was originally introduced, an exiting employer’s right to a surplus payment arose automatically save that it was (within reasonable parameters) down to the LGPS fund to determine the assumptions underlying the funding calculation from which the surplus calculation was derived.

In 2020, MHCLG amended the exit credit regulations and cancelled that automatic right in favour of a discretion to be exercised by the LGPS funds as to the extent to which surplus should be distributed. This change was made with retrospective effect back to the date of the 2018 Regulations coming into force and therefore covers exit credits which would have been payable prior to the change. EMS sought judicial review of the retrospective effect of the 2020 Regulations as it argued it was entitled to an exit credit from the LGPS under the 2018 Regulations.

The Court in its judgment found in favour of MHCLG and upheld the retrospective effect of the 2020 Regulations. The consequence of the Court’s decision is that all exit credit payments, which have not already been settled, will fall to be dealt with under the 2020 Regulations. In practical terms this means that LGPS funds have a discretion over the amount of an exit credit (surplus payment). As the amount may be zero, there is discretion whether to pay an exit credit at all.

Whilst the result of this challenge means the law as it stands has been upheld, the Court provided helpful clarification in relation to the provisions in the 2020 Regulations which give LGPS funds discretion as to the amount, if any, of an exit credit. Key points noted by the judge were:

• LGPS funds should make a rational and fair application of the legislation, giving their words their clear meaning;
• LGPS funds, when exercising discretion, should have regard to all the relevant facts of which they are aware, and consider all the relevant factors set out in the regulations – noting the regulations do not make any single factor conclusive;
• regard may always be had to the fact that by virtue of the regulations introduced, MHCLG provided for the possibility of exit credits, and that also the revised regulations inserted a discretion rather than an absolute entitlement;
• the regulations do not give “primacy” to any single factor, and the weight given to any relevant factors will always depend on the circumstances of the individual case.

Subject to any appeal, this decision provides much needed clarity as to the legal effect of the 2020 Regulations, and also importantly provides clarification of the decision making process to be adopted by LGPS funds in surplus cases.