The Ministry of Housing, Communities and Local Government (MHCLG) has now published its long awaited consultation on changes to the Local Government Pension Scheme (LGPS or the Scheme) to bring the LGPS into line with the requirements of New Fair Deal.

Letting authorities and service providers can expect changes to how they approach pension provision and risk sharing on a transfer of employees from local government. There are also changes around what happens to pension liabilities when Scheme employers are involved in mergers and takeovers. Once finalised, the regulations will amend the Local Government Pension Scheme Regulations 2013 (the 2013 Regulations). This Insight summarises the key changes proposed by the Government.

Key consultation points for letting authorities and service providers to consider

1. It is proposed that service providers will be required to offer LGPS membership on all compulsory transfers of employees from a 'Fair Deal employer'

The Government is proposing to remove the option for service providers to put employees transferring from local government to the service provider into a broadly comparable pension scheme. Instead, such employees would remain in the LGPS.

2. Employers with broadly comparable schemes should prepare for changes on contract re-lets

It is proposed that on future contract re-lets, protected employees who have been transferred to another employer in the past and participate in a broadly comparable scheme should be offered membership of the LGPS and the opportunity to transfer their accrued benefits into the LGPS.

3. It is proposed that the 'deemed employer' approach is extended and used in place of the service provider entering into an admission agreement

Under the proposals, the letting authority would have the option to remain the deemed employer in relation to the transferring employees for certain LGPS purposes, such as contributions and funding risk, even though the service provider would become the employer in all other respects.

4. A change to the regulations would provide for the automatic transfer of assets and liabilities to a successor body where a Scheme employer is taken over or is part of a merger

The change is proposed to address concerns that on mergers or take overs, exit payments can sometimes be triggered unintentionally. The proposed change would mean that the pensions liability automatically transfers, unless specific legislative provisions require otherwise. This will apply even where the successor body is in another LGPS fund.

Introducing a Fair Deal approach to the LGPS

MHCLG has published a consultation on proposed changes to the LGPS, together with draft regulations, to:

  • implement a New Fair Deal style approach to local government outsourcing; and
  • require that LGPS assets and liabilities automatically transfer to successor body when a Scheme employer (as defined in the 2013 Regulations) is involved in a merger or takeover.

We look at the key points below.

The basics

A number of new definitions are introduced in the draft regulations and it is helpful to understand these before looking at the detail of what is introduced by the consultation.

Fair Deal employer

A Scheme employer under the 2013 Regulations, except for:

  • further education corporations, sixth form college corporations and higher education corporations; and
  • admission bodies.

protected transferee

A person who is an active member or eligible to be an active member of the LGPS immediately before the compulsory transfer of their employment and is employed by a Fair Deal employer.

service provider

A body that is contracted to deliver a service or a function of a Fair Deal employer.

What will be the impact of the proposed Fair Deal changes?

New contracts

As drafted, the regulations remove the option for service providers to put employees compulsorily transferring from a Fair Deal employer into a broadly comparable scheme. Instead, service providers would be required to offer such employees continued LGPS membership.

The draft regulations provide that where there is a compulsory transfer from a Fair Deal employer, a protected transferee must be given continued access to LGPS membership for as long as he remains a protected transferee and is eligible to be an active member of the LGPS.

A protected transferee will continue to be protected for so long as he is wholly or mainly employed on the delivery of the service (even if he is subsequently sub-contracted or otherwise transferred).

Where the protected transferee is transferred to the private sector (i.e. to an employer that is not a Fair Deal employer) then the Fair Deal employer letting the service contract must include, in the contract, provisions requiring that the protected transferees are provided with continued access to the LGPS by either:

  • the service provider entering into an admission agreement; or
  • the Fair Deal employer deciding to act as the deemed employer of the protected transferees.

It will therefore be the Fair Deal employer's choice which of these options is used.

Contract re-lets

Where a service contract is re-let, employees of service providers who have in the past been transferred from the LGPS into a service provider's broadly comparable scheme in accordance with the principles of the Best Value Staff Transfers (Pension Direction) 2007 or the Welsh Authorities Staff Transfers (Pensions) Direction 2012 would be regarded as being a protected transferee and entitled to re-join the LGPS.

Upon request from the individual, the administering authority must agree to accept a transfer of the member's benefits from the broadly comparable scheme into the LGPS. It is proposed that the transfer value would be calculated on a cash equivalent transfer value basis using factors contained in actuarial guidance issued by the Secretary of State.

The approach is intended to convert the transfer value received by the LGPS fund to an amount of career average pension on an actuarially neutral basis. It is less generous to the member than service credits on a day-for-day basis or actuarial equivalent, as required under New Fair Deal for transfers back into unfunded public service schemes. However, it is considered fairer across the board by MHCLG when taking into account the interests of all Scheme employers and the local taxpayer.

Admission body or deemed employer?

Where protected transferees are compulsorily transferred to a service provider, the outsourcing Fair Deal employer would have the options of either:

  • requiring the service provider to become an admission body in relation to the protected transferees; or
  • remaining the deemed employer for certain LGPS purposes, even though the service provider would be the employer in all other respects.

If the admission agreement route is used then the service provider will become an admission body and liable for the payment of ongoing contributions and any exit payment in the same way that it would be currently, unless specific risk sharing provisions are agreed. For the first time, the draft regulations make provision that the details of risk sharing arrangements between the Fair Deal employer and the service provider (as admission body) may be included in the admission agreement, provided that the Fair Deal employer has had regard to any advice issued by the Scheme Advisory Board. It is not yet clear whether this will be in place of the provisions in the service contract or as well as.

If the deemed employer route is used then:

  • the service provider does not participate as an employer in the LGPS;
  • the Fair Deal employer, as the deemed employer of the protected transferees, will be the employer for pension purposes and would retain the majority of, but not all, Scheme employer risks; and
  • the Fair Deal employer and the service provider will commercially agree in the service contract how they wish to apportion pension costs and risks between them. It is expected that the service provider would normally be responsible for the cost of decisions within its control. These could include redundancy, early retirement and the award of additional pension.

Extending the concept of deemed employer in this way would be a change in the mechanisms and approach to risk sharing. It will be important for Fair Deal employers and service providers to carefully consider, and document in the service contract, how they will cover the detail of the pension relationship, including the sharing of risk. However, there are benefits for all in removing the administrative burden of putting signed admission agreements in place, particularly where the service contract is only for a short period.

For this reason, the draft regulations state that advice will be issued by the Scheme Advisory Board, and Fair Deal employers will be required to have regard to this advice. MHCLG have said they will work closely with the Scheme Advisory Board to develop this advice. The consultation also specifically asks stakeholders to consider what the advice should contain to ensure that the deemed employer status works effectively.

In our view, there are also considerations for the administering authority in relation to deemed employers, particularly in relation to the flow of information to them, given that the service provider will retain an administrative role in relation to the pensions of their employees. In addition, how will the administering authority ensure that they are kept informed of the Fair Deal employers' decisions to be a deemed employer (particularly where the Fair Deal employer is not the same legal entity as the administering authority). It is anticipated that further detail will be included in the advice issued by the Scheme Advisory Board.

Separate guidance will be issued by the Department for Education for proprietors of academies. The consultation anticipates that the deemed employer approach could only be used by proprietors of academies where they include specific provisions within the service contract to protect the proprietor, and ultimately the Department for Education, from pension risks which should in all cases be met by the service provider.

Automatic transfer of LGPS liabilities

Should LGPS liabilities automatically transfer on a merger or takeover?

Separately, the consultation sets out proposals to provide that when a Scheme employer is merged with or taken over by another organisation, the successor organisation would automatically become responsible for the Scheme employer's LGPS pension liabilities.

This proposal is intended to prevent exit debts being triggered unintentionally when a Scheme employer merges with another organisation or is subject to a takeover and, on the face of it, sounds sensible. We see this being of particular use in relation to the statutory processes for the mergers of housing associations. However, there are important considerations in relation to the process. For example, there may be circumstances in which an automatic transfer would not be the ideal outcome.

In addition, it is proposed that where the successor body is a Scheme employer with active members in a different LGPS fund, the assets and liabilities must be automatically transferred to that fund and combined with the successor body's assets and liabilities.

It is proposed that the Secretary of State should issue guidance on this area and that in particular, the guidance should cover the terms of the transfers of assets and liabilities between pension funds.

What should local government bodies and service providers do next?

These proposals are still at the consultation stage at present and we expect that there will be a significant number of responses to the consultation for MHCLG to consider. Given the additional requirements for advice from the Scheme Advisory Board as well as guidance from other bodies to accompany the finalised regulations, it seems unlikely to us that the position will be finalised in the shorter term.

There are a number of key questions set out in the consultation document for stakeholders to consider. If you would like to comment on any of the proposals, comments should be submitted to MHCLG by 4 April 2019. Or if you would like to discuss your views on the proposals with us, do get in touch with the team.