Employers Preparing for LGPS Exit
Building on our previous discussions – in Bulletin 59 and LGPS Case Studies – about the changes in Scottish LGPS regulations, it’s crucial for employers to stay informed and prepared as the regulatory landscape continues to shift. While the consultation on making exit credits discretionary has been delayed, the changes are still expected to align with practices already in place in England and Wales.
With all this in mind, employers need to carefully consider their approach to exiting an LGPS. Below we provide tips for employers planning an exit, focusing on the key strategies to manage legal, financial, and HR considerations to ensure a smooth exit transition.
Leaving Local Government Pension Scheme Options:
1) Complete due diligence on exit ability, e.g. admission agreement, transfer agreement, contracts of employment.
Identify what legal steps need to happen to allow the exit by undertaking some due diligence. This is likely to include understanding the basis for the participation in the LGPS and what legal constraints around that might be. For example, employers that inherited staff historically from the public sector may have pension provisions in the transfer agreement. Identify any legal hurdles as early as possible to allow you to plan a route through to exit.
2) Get clarity from the fund on their exit credit policy in advance
We expect the Scottish funds will develop exit credit policies. This could be a standalone document, or it could form part of the funding strategy statement. It is important to locate the policy and consider this in advance. It is unlikely the policy will cover every possible scenario, and funds should not follow policies totally rigidly.
However, they are likely to indicate the way in which the fund is likely to consider different factors and give a steer on how it will likely exercise its discretion around exit credits.
3) Make representations to the fund if there is a strong case for payment of an exit credit (e.g. been on-risk during participation in the fund)
Employers should give careful thought to any representations they might want to make to funds around exit credits, referring specifically to the fund’s policy, but also drawing out specific elements of the employer’s participation which would be helpful to demonstrate why an exit credit should be paid. For example, the level of risk borne by the employer and whether deficit contributions have been paid. Funds have to consider these representations as a requirement under the regulations and they represent an important opportunity for an employer to make their case as to why they should receive some of that surplus.
4) Consider an indicative cessation valuation that is guaranteed for 90 days
There remains an ability under existing Scottish regulations to get an indicative cessation valuation that is transactable and guaranteed for 90 days. It was used a lot when dealing with exit debts to provide cost certainty on those debts before proceeding. It can still be useful now with a surplus, to lock down the surplus position. 90 days tends to be a sufficient period of time to run the exit process and associated staff consultation.
5) Profile affected employees, and consider any win-wins to ease the HR impact of an exit (e.g. funding an early retirement strain, buying additional deferred pension)
It is often the case that a closed group of employees remain in LGPS, with the majority of other staff in DC.
Perhaps your LGPS participants are closer to retirement, where allowing early retirements may help ease the exit process. By profiling the workforce, you can identify any ‘win wins’ that can ease the exit. You might look at buying additional deferred pension for people a bit further away from retirement or offering enhanced DC for a period of time. Using the surplus to buy additional benefits in the fund can also be a way to access value from the surplus if the fund is not proposing to pay an exit credit.
6) Understand implementation costs (advisers, funds)
Even if you are in an exit credit position and potentially getting a large payment back from the fund, you do want to understand the implementation costs. This includes advisor costs for both the employer and in some cases for the funds.
Final Considerations and Next Steps
The leaving local government pension scheme options outlined above provide a solid foundation to help you navigate the complexities of an LGPS exit, ensuring that legal, financial, and HR considerations are taken into account By taking these steps, you can better position your scheme for a smooth transition, while reducing risks and maximising benefits.
Sign up to our newsletter for further regulatory developments, if you have questions about the new discretions in LGPS exit credits and need further clarification, or you want to explore specific strategies tailored to your scheme, please don’t hesitate to reach out.
