The Government is proposing to guarantee pension liabilities for academies in the Local Government Pension Scheme (LGPS). This is according to a ministerial statement issued last week by Michael Gove the Secretary of State for Education. The Government's proposal states high employer contribution rates set for academies by the LGPS are having a detrimental effect on academy budgets. In some cases this is preventing schools from converting to academies. The proposed guarantee seeks to remedy the situation.
What is the issue?
Academies must offer their non-teaching staff membership of the LGPS. Mr Gove is concerned that some administering authorities in the LGPS view academies as higher risk than local authority maintained schools, because academies no longer have the financial backing of a local authority. Unlike a maintained school, if an academy is wound up and its pension liabilities exceed its assets, the local authority would not step in to pick up the bill.
There is evidence that as a result of this perceived reduction in covenant strength, academies are being asked to provide higher pensions contributions than they did as maintained schools and to work to a shorter deficit recovery plan. This runs counter to the Government's stated intention that the overall costs for an academy to participate in the LGPS should not increase as a result of its conversion to academy status.
What is the proposal?
The Department of Education (DofE) laid a Minute before Parliament on 2 July stating that DofE is:
"... providing a guarantee to LGPS Administering Authorities that in the event of the closure of an Academy Trust any outstanding liabilities will not revert to the fund. Provided such assurances will give Administering Authorities the confidence they need to treat academies equitably and ensure that there is no significant divergence in employer contribution rates upon academy conversion."
The statement confirms that the Secretary of State has the power to determine the distribution of an academy's assets and that in the first instance pensions liabilities would be met from those assets. Any remaining LGPS deficit would then be met in full by the DofE.
There are some reservations and limitations to what might otherwise appear to be a wide guarantee. HM Treasury reserves an option to reassess the approval of the guarantee at a later date due to "spending considerations or policy developments" and the DofE and HM Treasury reserve the right to withdraw the guarantee at any time following a reasonable period of notice.
Examples of grounds for withdrawal include if the DofE's estimated liabilities (based on academy pension deficit information and maintained school closure data) are exceeded and projected costs are no longer affordable from within the DofE's budget or are not approved by HM Treasury. It remains to be seen whether there will be any other grounds for withdrawing the guarantee and, if so, what these might be.
Will the guarantee satisfy administering authorities?
Administering authorities need to be mindful that although the guarantee does not have a planned end date, it could be withdrawn by the DofE or HM Treasury. Furthermore, the likelihood of regular reassessments of affordability could weaken the security provided by the guarantee; at least as far as the recipients of the guarantee are concerned.
What about academies who have already converted?
In his statement, Mr Gove confirms that he expects all administering authorities to review academy risk assessments and to treat academies equitably when setting contribution rates. It is unclear whether academies which have already agreed higher contribution rates and periods before the announcement will be able to re-negotiate prior to the next round of LGPS valuations. It may take a while to achieve the parity that Mr Gove would like to see between maintained schools and academies.
Could "pooling" help to reduce contributions?
The DCLG is to launch a consultation this summer on whether academies should be entitled to enter into a pooled arrangement. Mr Gove hopes that pooling will harmonise employer contributions where academies and local authorities participate in the same pool. Broadly, pooling works by using shared actuarial assumptions across the pool members. All members are responsible for meeting the cost of the full past service deficit for that pool and all share the same deficit recovery period.
A robust, workable guarantee will be of benefit to both administering authorities and academies.
The proposed guarantee will address some of the concerns that exist in respect of the current position for schools converting to academy status.
However, a guarantee that can be withdrawn may not provide administering authorities with the comfort they need. It may not, therefore, deliver the solution academies are looking for in terms of funding their pension liabilities.
Only time will tell whether the combined effect of the proposed guarantee and the option for academies to enter into pooled arrangements will redress the perceived pension funding issues currently faced by academies.