Consultation on mitigating LGPS risk for admitted bodies

The Government has recently published a consultation on changes to the Local Government Pension Scheme (LGPS).

The consultation will be of particular interest to those who regularly enter into contracts with local authorities, outsourcing services or are concerned about how legacy LGPS arrangements could impact upon their ability to merge.

No more ‘broadly comparable’ schemes

Under the Best Value Pensions Direction, local authorities are required to ensure any employees being compulsorily transferred out are provided with access to either the LGPS or a broadly comparable pension scheme. The consultation proposes to remove the option of offering a broadly comparable scheme going forward. This effectively replicates the New Fair Deal of 2013 in relation to staff transfers from central government. Further, the consultation proposes that for any existing contracts that fall under the Best Value Pensions Direction, employees would gain a right to membership of the LGPS when they are next re-tendered even if in-between they have been placed in a broadly comparable pension scheme.

Our experience is that many of our clients have historically chosen to become admitted to the LGPS rather than provide a broadly comparable scheme because of the cost associated with this, so this part of the proposal may have little impact in practical terms.

Protected Transferees

It is proposed that a new definition of Protected Transferee is introduced under the regulations.  In practice this definition doesn’t really change the position under the existing Best Value Pension Direction however the draft regulations do extend this definition to employees that were not originally employed by the local authority on the agreement of both parties. Even if the parties agree to widen the category of Protected Transferees under the amended regulations, either party can decide they are no longer eligible at any time which appears to make this a pointless amendment.

Risk-sharing

The more interesting reading relates to risk sharing and proposals that those contracting with local authorities may not need to be become admitted to the LGPS themselves, but rather can participate via the local authority being a “deemed employer” for the purposes of pensions. The concept of the deemed employer is not a new one and is already provided for in the LGPS Regulations however is only available in specific limited circumstances.

The proposal is that employees would still be compulsorily transferred from the local authority to a service provider and become their employees, however the local authority would remain their deemed employer for the purposes of pensions.  The intention behind this is to deliver better value for money for local authorities, because with appropriate risk-sharing bidders shouldn’t need to price in so much for LGPS risk, and to encourage smaller providers to tender who might otherwise be put off by a fear of LGPS liabilities.

It shouldn’t be expected that service providers will suddenly not have to pay anything for LGPS benefits; each local authority will determine precisely how LGPS risks will be shared subject to taking account of new guidance that would be issued.  However a service provider could reasonably expect to at least benefit from a lower employer contribution rate (albeit likely still paying at least a part of that) and a more favourable funding basis.  It would also be possible to negotiate about what should happen to any deficit at the end of the contract term.  Not having to become admitted to the LGPS could also have accounting benefits and save the need to check for, and seek if required, lender consent to participate in a new pension scheme.

The drafting of the consultation makes clear that the concept of the deemed employer would be an option for local authorities and therefore if it were to be implemented, it would not necessarily be the case on every outsourcing.  But even if the service provider has to become admitted to the LGPS in its own right, the option of risk-sharing could still be provided for within the Admission Agreement. This could also be of benefit when re-tendering for existing contracts as local authorities may be more willing to share risk. The local authority’s approach should be made clear at the point of inviting bids.

Mergers

The Government is also consulting on automatically transferring the assets and liabilities of admitted employers within the LGPS on a merger or takeover situation. Under the current LGPS Regulations, dependent on how a merger is implemented it may result in the exit liability of an admitted employer being triggered and becoming immediately payable.  Whilst we have avoided this situation for a number of clients by putting in place legal agreements with various LGPS Funds, the proposal would mean such agreements are no longer required which we are sure would be welcomed by the social housing sector which is constantly changing and evolving by mergers and new group structures. In some cases clients have found the administrative red tape of LGPS Funds has held up proposed merger timelines and this proposed amendment would avoid such a situation.

The proposals extend to the automatic transfer of assets and liabilities from one LGPS Fund to another in a merger situation.  In our view this could cause problems if the funding position and contribution rates of the merging entities in two different LGPS Funds are not the same. As such we anticipate there are situations where clients may not want there to be an automatic transfer of assets and liabilities but the draft Regulations don’t give the employer any choice in the matter. The consultation proposes that Secretary of State guidance is issued on this area.

It is not clear what would happen on a merger effected by a statutory amalgamation under the Co-operative and Community Benefit Societies Act 2014 as the generally accepted (although untested) principle is that it does not result in an admitted employer becoming an exiting employer under the LGPS Regulations. If this remains to be the case then the amendment would not extend to the automatic transfer of assets and liabilities on an amalgamation and even if the position changed, it is not clear how it would be decided which LGPS Fund the transfer would be from and to.

Whilst we don’t think that the mandatory transfer of assets and liabilities is necessarily the best idea, we do think that it would be helpful for clients if the new rules could provide for transferring assets and liabilities between Admission Agreements in a particular LGPS Fund in a non merger situation.  We have a number of clients with members in various different LGPS Funds as a result of historic mergers and stock transfers. Whilst these clients still have a healthy number of active members participating in the LGPS overall, they are at risk under specific admission agreements where they have a diminishing number of members. This means that they are at risk of an exit liability being triggered in the short term when the last active member under a specific admission agreement leaves. We consider this risk could be mitigated if the LGPS Regulations provided for the transfer of assets and liabilities in a non merger situation also, meaning clients are able to move all their assets and liabilities, and members under one admission agreement.

The consultation runs until 4 April 2019.

We will be submitting a response to the consultation and would encourage anyone else with views on the proposals to do so too.

If you have any queries relating to this consultation or the LGPS generally please contact Jane Bowen or your usual Devonshires contact.

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