Following a consultation in May 2016, the Local Government Pension Scheme (LGPS) Regulations 2013 are being amended from 14 May 2018. One of the most significant changes is that it will be possible for an exit credit to be paid where an exiting employer's liabilities are fully funded and there is a surplus of assets in the pension fund.
However, in relation to how best to introduce New Fair Deal into the LGPS, the Government considers that the range and diversity of issues highlighted by respondents means it is not in the best interests of administering authorities, members or employers for the draft regulations to be implemented as originally issued. Instead, new proposals will be consulted upon by the end of the year.
In this article, we take a look at what's changing and what's proposed.
Points to note
1. The Government remains committed to introducing New Fair Deal into the LGPS
The Government will consult later in the year on the precise arrangements on how best to implement New Fair Deal into the LGPS. In the interim, some changes are being made in relation to exit credits and admission agreements from May 2018.
2. Various amendments will come into force from May 2018
Additionally, various other scheme changes are also being made, for example, in relation to the 50/50 option, assumed pensionable pay, benefits and absences.
3. Members will still have to transfer Additional Voluntary Contributions (AVC) out to access uncrystallised funds pension lump sums (UFPLS)
Proposals to widen the range of options for members to enable them to access benefits from the LGPS's AVC arrangements are not, however, being taken forward.
DCLG's proposals in May 2016
To extend New Fair Deal to the LGPS
In May 2016 the Department for Communities and Local Government (DCLG as it was then) proposed that New Fair Deal be extended to the LGPS, with the Best Value Authorities Staff Transfers (Pensions) Direction 2007 ("the 2007 Pensions Direction") falling away. So, on any new outsourcing, instead of having the option of either providing a broadly comparable scheme or becoming an LGPS employer under the 2007 Pensions Direction, the default position would be for the outsourcing contractor to participate in the LGPS as an admission body. Outsourced staff compulsorily transferred out under New Fair Deal would remain in the LPGS (for as long as they are wholly or mainly employed on the delivery of the service or function transferred).
However, in relation to subsequent re-tenders, it was proposed that staff previously outsourced under 2007 Pensions Direction would not fall under New Fair Deal on subsequent re-tenders (unlike for re-tenders in the NHS and Civil Service).
To make miscellaneous amendments
In addition to New Fair Deal, the consultation also focused on several other areas, for example how to access and use additional voluntary contributions (AVCs) as well as suggesting some "administrative" changes.
Consultation Response April 2018
New Fair Deal needs more work for adaption to the LGPS
Respondents to the May 2016 consultation were said to be largely supportive of the Government's general aim to introduce New Fair Deal into the LGPS, but often with serious reservations about how the proposed draft regulations would do that in practice.
Administrative complexity around the additional administrative burdens arising from an increase in employer numbers as well as the type of employer in scope (such as "community" admission bodies) were said to be of concern, along with the absence of any transitional arrangements on re-tenders for those already transferred out under existing outsourcings.
Pass-through arrangements (whereby contractors pay a fixed employer contribution rate for the life of the contract, subject to certain exceptions such as redundancy strain costs which the contractor would remain liable for) were felt by some respondents to provide contractors with more certainty on costs, avoiding expensive risk premiums being built into contract costs and therefore opening up tender exercises to smaller organisations otherwise unable to bear the risk.
The Government concluded that the draft regulations consulted upon would not be appropriate so has decided to consult on new proposals by the end of the year for achieving New Fair Deal in the LGPS.
What about new and re-tendered outsourcings currently being negotiated?
For new outsourcing arrangements, Pensions Direction 2007 remains valid and should be followed. In our experience, the use of admission agreements has been much more prevalent than transferring outsourced staff to the contractor's broadly comparable scheme. We anticipate this trend is likely to continue.
What amendments have been made to the existing admission agreement regime?
Although there is no wholescale reform at the minute, in the short term, the Government decided to press ahead with some changes to the current regime from May 2018. These largely align the LGPS's admission body provisions with the Public Service Pensions Act 2013 (PSPA 2013) and also introduce the payment of an exit credit when an employer ceases to participate in the scheme with a surplus of assets.
Exit credit
When an employer becomes an exiting employer the usual valuation will be undertaken as at the exit date. A revised rates and adjustments certificate will be issued showing the exit payment due from the exiting employer or the exit credit payable to the exiting employer in respect of the benefits for the exiting employer's current and former employees. We consider that the exiting employer will therefore be expected to be fully funded on a cessation basis with a surplus before an exit credit will be paid.
Administering authorities will have to pay any exit credit within three months of the employer ceasing to be a scheme employer. Once the exit credit is paid, no further payments are due from the administering authority. There is no corresponding provision under the regulations to state that no further payments are due from the exiting employer, although this would appear to be the intention.
While this change is likely to be welcomed by contractors and may help from the perspective of reducing contractor antipathy to making payments to the scheme which might otherwise have become trapped, there are some practical considerations in terms of completing the exit valuation, agreeing the amount of any exit credit, and paying it within the three month time scale (unless a longer period can be agreed between the administering authority and the exiting employer).
Admission Agreements
By amendment to the LGPS (Transitional Provisions, Savings and Amendment Regulations) 2014, existing admission agreements are to be treated as if they had been the subject of a determination under section 25(5) of the PSPA 2013 (i.e. that the authority has determined that the LGPS applies to those persons covered by the admission agreements, being persons who do not fall within the core description of public service workers). The PSPA 2013 requires authorities to publish a list of the persons for whom a determination has been made under section 25(5) and therefore administering authorities are required to publish a list of their current admission agreements. The regulations require this to be done within 12 months of the date of the regulations.
Helpfully, regulations also confirm that admission agreements can have retrospective effect. This has always been considered to be the case and happens in practice so it is welcome that there is now clarity in the regulations themselves. There are some additional amendments to remove the requirement for administering authorities to make admission agreements available for public inspection as well as to inform the Secretary of State when they enter into admission agreements.
Miscellaneous other amendments
Some other amendments of interest covered by the regulations are mentioned below.
Additional Voluntary Contributions
The Government's proposal to introduce a new regulation to provide a wider range of options for members to access benefits from the Scheme's AVC arrangements is not proceeding. This is because it was considered that introducing these provisions directly into the 2013 Regulations would create substantial administrative complexities, largely due to the large number of AVC providers that exist in the LGPS.
This means members will have to transfer AVCs out of the Scheme in order to take access uncrystallised funds pension lump sums (UFPLSs).
Assumed pensionable pay (APP)
Employers have greater discretion in the calculation of APP where, in the view of the employer, it would otherwise be materially lower than the level of pensionable pay that the member normally received. An additional regulation clarifies how 'normally received' should be determined. Averaging of APP for returning officers to avoid disproportionately high or low figures being used is also introduced.
Pension Accounts
The Government is not proceeding with its proposal to end automatic aggregation of pension accounts when a member with a deferred pension account becomes an active member again. This is because it was concluded that introducing these changes would not be consistent with provisions of the PSPA 2013 requiring that final salary protection is provided where a member re-joins a public service pension scheme within five years of leaving their previous public service pension scheme.
Retirement Benefits
Amendments confirm that a member is only required to take benefits from their active pension account where their employer is terminated due to redundancy or business efficiency and the member is over age 55.
Public Sector Transfer Club
There are amendments to the regulation that the administering authority must comply with the Public Sector Transfer Club Memorandum where a transfer is a Club transfer.
What to do in the short term?
Keep calm and carry on!
The short term legislative tinkerings relating to admission agreements are welcome, particularly in relation to an exit credit being at least theoretically possible.
It is disappointing that there will still not be New Fair Deal regulations by the end of the year but we will look forward to receiving further proposals for consultation. It will be interesting to see how the proposals will deal with the practical difficulties for administering authorities that go with increased numbers of employers in the Fund and whether pass-through provisions in the regulations themselves will be part of the solution to these difficulties.