What Employers Need to Know
There have been two significant developments in relation to Scottish LGPS exit credits recently. Firstly, after being trailed in May 2024, it is now confirmed that payment of exit credits will be discretionary in Scottish LGPS funds for payments made after 2 April 2025. Prior to this, funds had to pay an exit credit on the cessation of an employer if there was a surplus on a cessation basis. It brings the position in Scotland in line with the position in England & Wales. Secondly, a few employers in Scottish LGPS funds have found themselves on the wrong side of press articles recently for proposing changes to pension benefits to access LGPS exit credits. Two high profile examples have been River Clyde Homes and the University of Strathclyde.
What does this all mean for employers in Scottish LGPS funds? Here are our 4 top tips:
Top tip 1: robustly scrutinise your employer contribution levels
When we were in a world where funds had to pay exit credits back to employers on cessation, employers could be more relaxed about paying higher ongoing contributions because they knew they would receive any over-payments back on cessation. With exit credit payments becoming discretionary, this position becomes more uncertain – over-payments may not be refunded on cessation. Therefore, review funding positions and contributions, and challenge funds if it looks like you are over-paying, including asking them to use surpluses to fund future pension benefits. This should certainly be done at the 31 March 2026 valuation, and potentially sooner if the over-funding is very significant.
Top tip 2: understand your Fund’s discretionary policy
The funds are reviewing their Funding Strategy Statements to incorporate policies to set out how they will operate their new discretion. Ensure you understand your Fund’s policy, and if it’s not clear, ask your Fund how it applies in your circumstances. Under the relevant regulations, the Fund has to consider factors like the extent of the surplus, the proportion of the surplus relating to employer contributions, any representations made by an exiting employer and any other relevant factors, when exercising their discretion.
Top tip 3: make a representation to your Fund
If it is not clear if your Fund will exercise its discretion to pay an exit credit, make a representation. Funds must consider these representations. The case for an exit credit payment is strong if an employer has been on-risk for LGPS pension contributions whilst participating in the Fund. This is the case for many employers, with the main exception being local authority outsourcers with pass-through arrangements, whereby the LGPS pension cost is passed back to the local authority. Employers with very strong guarantees from local authorities may also be in a similar situation, although in many cases guarantees do not pass ongoing pensions risk back to the authorities, and employers are still on the hook for changes in contribution levels.
Top tip 4: structure a generous replacement offer for affected employees if exiting LGPS
LGPS funding levels are now exceptionally strong – it’s becoming increasingly rare to see a deficit on a cessation basis. Most employers are sitting on exit credits, or can certainly exit LGPS for nil cost even if they can’t access an exit credit. Employers may therefore be considering an exit, either to remove LGPS pensions risk from their balance sheet, or possibly to access an exit credit that might otherwise shrink in the future with adverse market movements.
An exit is triggered by moving employees in LGPS to another pension arrangement for future pension savings. This may need the agreement of affected employees if they have a contractual entitlement to LGPS. In this situation, a replacement pension offer needs careful consideration. A generous offer improves the ability to achieve employee agreement and avoids the risk of adverse publicity. It should therefore be considered, particularly if it can be funded from an exit credit. An LGPS exit can be a win-win that unlocks surplus for the employer whilst providing a generous, more flexible benefits package for employees, but only if it’s done properly!
Contact us today if you’d like to discuss your situation or hear more about your options.
More Information
For further details on navigating discretionary refunds of LGPS surplus payments, we encourage you to watch our latest webinar, “Scottish LGPS funds: How Should Employers Navigate Refunds of Surplus Becoming Discretionary.” Access the webinar and explore strategies for managing your pension funding effectively.
