Bulletin 58 – Consultation on making exit credits a discretion

LGPS 30 May 2024 By Alistair Russell-Smith

Current Situation

The Scottish Public Pensions Agency (SPPA) is running a consultation from 10 – 30 May, which proposes making the payment of exit credits discretionary for payments after 29 June 2024.  This would align the position in Scotland with the existing position for funds in England & Wales.  With significant improvements in LGPS funding (bulletin 57) in recent years, this is significant because many employers are in surplus on a cessation basis.  Prior to this consultation, employers could proceed with an exit, confident that the fund has to pay an exit credit if there is a surplus on cessation.  The proposal introduces uncertainty for employers, and means understanding the policies of individual funds for exercising their discretion will be critical.

Implications of the Proposal

The proposal also introduces an unhelpful circularity because employers will not be able to bank on receipt of an exit credit when considering the affordability of replacement pension offers to make to staff in order to initiate an exit in the first place.  So, it could lead to employers being unable to exit where it would otherwise have been viable.  For weaker employers looking to de-risk, this seems a lose-lose situation for the employer and the fund.

We’re hopeful that funds will exercise the discretion in a pragmatic way.  To our mind if an employer has been fully on the hook for funding risk whilst participating in the fund, then it is appropriate that they should receive an exit credit on cessation.  This is just consistent treatment of downside risk and upside risk.  However, if an employer has not been on the hook for funding risk whilst participating, perhaps because of a pass through arrangement, then it seems reasonable that they should not access an exit credit on cessation.

Full details on the consultation can be accessed here: Consultations | SPPA (pensions.gov.scot)

The Spence response to the consultation can be accessed here.

Top tip: understand your fund’s discretionary policy

If you are considering an exit from your LGPS fund, engage with your fund and understand how they will implement this new discretion, and therefore whether your organisation is likely to access an exit credit on cessation.  You need to be confident of the position ahead of exit as the accessibility or otherwise of an exit credit will likely dictate the affordability of any replacement offer you make to affected staff to initiate an exit.

Contact us today if you’d like to discuss your situation or hear more about your options.

Alistair Russell-Smith

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