Local Government Pension Scheme: New draft legislation proposes mandatory bond requirement for admission agreements

In December 2011 the Department for Communities and Local Government (DCLG) issued a consultation letter to all administering authorities in the Local Government Pension Scheme (LGPS) inviting comments on the draft provisions of its proposed new legislation: the Local Government Pension Scheme (Miscellaneous) Regulations 2012 (the Draft Regulations). Consultation closed on 27 February 2012.

Most of the Draft Regulations are miscellaneous in nature and amend provisions within the existing statutory framework. Seven of the proposed amendments specifically relate to ill-health provisions.

It is Regulations 21 and 22 of the Draft Regulations that cause concern.

Regulation 21, amending Regulation 6 of the LGPS (Administration) Regulations 2008, will prevent administering authorities from entering into admission agreements covering more than one contract with a contractor which is, or is about to be, a transferee admission body(1). In order to satisfy this provision, separate admission agreements will need to be entered into for each contract, as the start and end dates will be different for each contract.

Regulation 22, amending Administration Regulation 7 of the LGPS (Administration) Regulations 2008, will make it a mandatory requirement for all transferee admission bodies and all community admission bodies to have an indemnity or bond in place. This Regulation would replace the current requirement of letting the administering authority carry out a risk assessment of the body wishing to join the LGPS to decide whether a bond or indemnity is required. Additionally, in such circumstances where a transferee admission body or a community admission body is unable to provide an indemnity or bond, some form of parent guarantor will need to be provided.

The Government’s aim behind the Draft Regulations is to protect other employers in the LGPS fund and council tax payers in the event of an admitted body being wound up, going into administration, or facing other financial difficulties.

Since the consultation closed, Devonshires has been able to obtain some stakeholder feedback via the public domain. Whilst the Government’s rationale for bringing in the proposed changes has not been challenged, Regulation 22, in particular, has generated significant comment, with stakeholders being clearly concerned about the costs and practical value of putting a mandatory bond or indemnity in place:

• A Senior Pensions Adviser expressed concern that only permitting forms of parent guarantees when it was not possible to obtain an indemnity or bond could be “overly prescriptive”, describing a situation where it was potentially possible for a small transferee admission body (to whom only one or two staff transferred) to obtain a bond or indemnity but that where the costs would outweigh the potential risk.

• A large County Council raised concerns that a mandatory bond or indemnity would be too costly and would not represent good value given existing mechanisms in place that ensured the Council retained responsibility for any funding deficit (the aspect that would form the largest component of a required bond assessment).

We are currently awaiting the Government’s formal response to the consultation. We have been informed that responses to the consultation are currently being assessed in order that Ministers can make a fully informed decision on how to proceed. The Government are reluctant to put a time frame on the response but have confirmed it is not yet ready for immanent publication.

Be sure to continue reading the Devonshires Employment Law blog for further developments.

(1) Admission bodies are those entitled to participate within the LGPS and fall within two categories:

(1) community admissions bodies and
(2) transferee admission bodies

Community admission bodies have a “community of interest” with local government employers (such as CABs) whilst Transferee admission bodies are companies that have taken on work on behalf of local authorities (e.g. on outsourcing a service).

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