As a part of updates to the LGPS Regulations in 2018 we saw the introduction of the concept of ‘exit credits’. This was where the funding position of a specific employer in the scheme was in surplus and the employer was due a refund of any surplus amount on leaving. This in my view was wholly reasonable and indeed was also helpful in allowing employers to pre-fund future scheme exits in the knowledge that they couldn’t end up making over payments which would be trapped in the Scheme and they couldn’t ultimately access.
The 2018 Regulations saw the exit credit as an automatic right but with the Funds (via their actuary) having control over the assumptions used in its calculation. This was usually the same basis adopted in calculating exit deficits (i.e. nil risk gilts-basis) which meant a credit payment was likely only to be due for a very small number of employers.
In 2020 the Ministry of Housing, Communities and Local Government (MHCLG) amended the exit credit Regulation removing the right to it and replacing it with a discretion to be exercised by the Funds. The change had a retrospective effect backdating the changes to 2018. The desire for this change was effectively linked to Funds having to return surplus even in circumstances where underlying guarantees were in place so effectively a deficit could not exist. This also seems wholly reasonable. However, the change has effectively resulted in a blanket discretion across all participation categories.
Enterprise Managed Service Limited (EMS) & Amey PLC sought a judicial review of the retrospective effect of the change in Regulation. The Court in its judgement [http://www.bailii.org/ew/cases/EWHC/Admin/2021/1436.html] upheld the retrospective change. This means that Funds do have a discretion over all exit credit payments and in theory could chose a zero payment option.
The judge did provide some clarification as follows:-
- Funds should make a rational and fair application of the Regulations, giving their words their clear meaning;
- Funds should have regard for all the relevant facts noting that the Regulations do not make any single factor conclusive;
- The weight given to any single factor will depend upon the specific circumstances;
- The Regulations introduced in 2018 did provide for exit credits even though this is now a discretion rather than a right.
Whilst the judges comments are helpful the change has undoubtedly created additional uncertainty over the application of the Regulations and therefore the amount of any credit payment.
The exit credit scenario is unlikely to impact many employers in LGPS but where it may employers should consider the implications, particularly where undertaking outsourced public sector contracts. Also if employers are thinking of (or indeed are likely to have to) exit they should seek clarity in advance how the Fund will apply the Regulations in their case. In addition, if employers are entering in to pre-funding or long term funding arrangements they should seek clarity on what will happen should the funding position become over-funded and have this incorporated in any legal documentation.