Finally at the end of February 2020 the results were published on the consultation on LGPS Reform for England & Wales, which ended 31 July 2019, and it’s a bit of a mixed bag.
Valuation Cycle
It is proposed to move the local fund valuation cycle from 3 years to 4 years to link with the Government scheme valuation. With this change it is proposed to provide funds with the power to undertake interim valuation and a widening of the power to amend employers’ contribution rates. What unfortunately has not been proposed is a strengthening of the communication requirements on Funds to ensure that admitted bodies are aware of their funding position more regularly over this lengthened period.
Dealing with ‘Tier 3’ employers
In terms of seeking to help funds provide additional options for employers looking to exit the response states “Current regulations require that when the last active member of an employer leaves the scheme, the employer must pay a lump sum exit payment calculated on a full buy-out basis.” This is fundamentally incorrect and is a misunderstanding also commonly held by LGPS Funds. Regulation 64 specifies that Funds must obtain “an actuarial valuation at the exit date”. It neither specifies that this must be done on a buy-out basis, or even that when carried out that it has to be enforced. It is the Funds, and their actuarial advisers, who chose to enforce this exit on a buy-out type basis but it is not actually stipulated.
The response makes the proposal “to introduce ‘deferred employer’ status that would allow funds to defer the triggering of an exit payment for certain employers who have a sufficiently strong covenant. Whilst this arrangement remains in place, deferred employers would continue to pay contributions to the fund on an on-going basis.” Whilst at a high level the proposal is welcome it is deficient in a number of key areas:-
- As part of our response to the consultation we highlighted specific experience of the introduction of similar provisions in Scottish LGPS in 2018. The revised Regulations were effectively ignored by Funds and has resulted in SPPA having to issue further consultation to see how the changes could be better implemented. The proposals made effectively replicate the Scottish wording without making any attempt to look to learn from their adverse experience.
- Helpfully the response does recognise that “some smaller and less financially robust employers are finding the current exit payment in LGPS onerous” and that “rather than protecting the interests of members, it may mean employers continue to accrue liabilities that they cannot afford.” It can also mean they are “driven out of business.” This is certainly becoming a much more common occurrence and is likely to continue apace over months and years as admission bodies closed to new entrants gradually reach a point where they have no active members.
However, worryingly, the response then does not specifically deal with this referring to employers with a “sufficiently strong covenant”. How would this be defined? What would happen for those employers who do not meet this classification? The response wholly ignores that employers with a weak covenant only option is to continue to accrue further liabilities without a solution which is neither in their interests, the Fund as a whole and other employers in the Fund.
There continues to be no recognition of the risk of future accrual and the strain that puts on Funds and other employers and that there needs to be compromise for weaker covenants to reach an amicable solution.
- There is a proposal that consideration is given to whether a maximum funding time limit of perhaps 3 years is considered. This is frankly ridiculous as the vast majority would struggle to pay cessation debts over even a 10 year term and much longer repayment terms need to be considered. For example, in Scotland, Strathclyde Pension Fund and Lothian Pension Fund are considering terms of up to 20 years. I would be interested to know what specific research has been carried out to consider if 3 years is affordable? None I suspect.
- There is little recognition that S75 deferred status being used (or more rather not being used) in private sector multi-employer schemes is very different to what is likely to be needed on LGPS schemes as the background is completely different. The overall covenant for LGPS schemes is much stronger as more employers have public sector backing and the distribution of liabilities much more widely distributed with small charities representing a tiny fraction of overall liabilities and therefore small changes in deficit amounts making a negligible impact on the overall Fund value at risk. Most importantly also it is much less likely that LGPS will ever close to future accrual so being able to fund over a long period of time is much more palatable.
- The issue of legacy liabilities which has seen admission bodies assume material amounts of historic benefits for ex public sector staff has been completely ignored.
- The seemingly endless round of consultation on ‘Tier 3’ employers looks to continue as the SAB have commissioned AON to look at funding, legal and administrative issues. Surely after all this time there can’t be key individuals within Funds who don’t understand the issues and options. But no, lets rehash them all again with a view to the SAB making some recommendations to the Secretary of State later in the year. A bit more fiddling while Rome burns!
Thankfully there are signs that some Funds are adopting a more pro-active approach even ahead of Regulatory change recognising that they need to do so in order to better deal with the issues. Unfortunately not all are quite so enlightened, choosing to wait for ‘chapter & verse’ when the consultation already confirms that the Ministry is not intending “to legislate for every aspect” but to provide a more flexible framework lead by Funds.
I can only hope we’re finally nearing the end of the ‘consultation’ and will soon move into something that looks more like implementation as demand is already high and only likely to increase.