The 11 Scottish LGPS funds have recently issued their 31 March 2023 valuation results, and employers are busy liaising with funds to finalise new contribution rates from 1 April 2024. But, what should employers do as they liaise with the funds?
The good news: 30-40% increase in funding levels!
Employers we’re working with are typically seeing a 30-40% increase in funding level from 31 March 2020 to 31 March 2023, which is a great start. There have been further improvements in funding levels since 31 March 2023, as set out in the chart below.
These funding levels mean most employers are in surplus on an ongoing basis, and are seeing LGPS funds propose lower employer contribution rates from 1 April 2024.
Whilst it might be tempting to simply accept the reduced contributions and move on, employers should consider the bigger picture.
Here are 3 top tips to consider:
1) Test the magnitude of the reduction in contribution rates
Whilst most employers are seeing lower contribution rates proposed, the extent of the reductions varies significantly across the funds and employers. In some cases, employer contributions are being pulled down to the employee rate of around 7%, whereas in other cases employer contributions remain above 30%.
Test the proposed contributions with your funds, and understand what levers are available to adjust contributions further. Time horizons, funding targets, probabilities of success, investment strategies and guarantees can all impact on required contribution levels.
2) Consider your exit position
Many employers have a closed group of employees in the funds and are on an inevitable time horizon to eventual exit when the last active employee leaves pensionable service. At this point, the funding position on a cessation basis is crystallised, leading to payment of a final exit debt to the fund, or payment of a final exit credit back to the employer.
Given funding levels are the best they’ve been in at least a decade, employers should consider if they should exit now rather than waiting for the last employee to leave. This removes the risk of exiting in the future when there is an exit debt, and in many cases is being realised as significant payments back to employers. Whilst exiting 3 years ago might have triggered an unaffordable exit debt, it could now trigger a payment back from the fund!
Clearly the issue with exiting is the impact on pensions savings for affected staff. But there are win-win options available to help manage this, such as sharing some of the exit credit payment with affected staff or letting older staff draw the LGPS pension whilst carrying on working.
3) Discuss partial cessations
If the impact of a full exit on employees is too much, consider a partial cessation. This is where your liability is settled for deferred and pensioner members, but you remain linked to the liabilities for your remaining active members. It shrinks the size of the problem, often by 50% or more, and means you may still get an exit credit payment back for your deferreds and pensioners, whilst leaving pension benefits undisturbed for remaining active members. This is a newly emerging solution which is not yet a well-trodden path, but may be worth considering if you have a strong funding position and do not want to disturb pensions for current employees.
Need support?
We’re advising employers to consider their full range of options off the back of the 31 March 2023 valuation results, rather than just accepting the short-term good news of lower ongoing contributions. Make sure you understand the exit opportunity too and assess that against your other priorities.
Contact us today or attend our forthcoming webinars either on the 28th of February at 12.30pm or 6th March at 12.30pm if you’d like to discuss your situation or hear more about your options.