LGPS: Review of Employer Contributions & Exit Payments

The Ministry for Housing, Communities and Local Government (MHCLG) has published its response to proposals on review of employer contributions and flexibility on exit payments, write Mercer’s Rebecca Dodd and Clive Lewis. This is a partial response to a wider consultation on changes to the LGPS in England & Wales dating from 2019.

Review of Employer Contributions

In view of responses to the consultation and subsequent representations, the Government has concluded that the power to review contributions between valuations should be available in respect of all employers. This would enable administering authorities to respond to the full range of circumstances which may occur between valuations, including potential impacts of COVID-19 and some other circumstances for example when local government reorganisation leads to a material change in liabilities. 

The Government will therefore amend regulations to grant administering authorities and employers the following new flexibilities:

• Administering authorities may review the contributions of an employer where there has been a significant change to the liabilities of an employer.
• Administering authorities may review the contributions of an employer where there has been a significant change in the employer’s covenant.
• An employer may request a review of contributions from the administering authority.

Administering authorities will be required to consult with the employer when undertaking a review of the employer’s contributions.

Where the funding position for an employer significantly changes solely due to a change in assets, the new Regulations will not allow employer contributions to be reviewed outside a full valuation.

Spreading Exit Payments

Following the consultation responses, the regulations/guidance will be amended so that there will now effectively be three options for an exiting employer (subject to agreement from the Administering Authority):

1. As currently, calculate and recover an exit payment for employers ready and able to leave and make a clean break.
2. Agree a repayment schedule for an exit payment with employers who wish to leave the scheme but need to be able to spread the payment.
3. Agree a Deferred Debt Agreement (DDA) with an employer to enable them to continue paying deficit contributions without any active members where the administering authority is confident that the employer would fully meet its obligations.

Whilst it was recognised that some administering authorities may already effectively offer Option 2 through side agreements, the introduction of Option 3 and the DDA could have a profound shift in the way exiting employers are treated.  Under a DDA, the exiting employer’s responsibilities will be the same as for employers of active members but excluding the requirement to pay primary contributions.

The ability for administering authorities to review the contributions of an employer between valuations could impact universities where they have undertaken strategy reviews (and therefore changed their liabilities) or where there is a change in the strength of the university (and therefore affecting the covenant).

The Deferred Debt Arrangements could prove a welcome change for those universities looking to extinguish all accrual in LGPS either now or in the future. i.e. the “clean break” approach which has often been too costly to date.

The outcome of the proposal to remove the requirement for higher education corporations in England to offer membership of the LGPS to their non-teaching staff for new entrants is expected in September.

Rebecca Dodd
Head of Mercer’s Higher Education Group
rebecca.dodd@mercer.com

Clive Lewis
Lead LGPS Specialist
clive.lewis@mercer.com