January 23, 2019

The Local Government Pension Scheme – Fair Deal proposals

The Ministry of Housing, Communities and Local Government has published its long expected proposals to change the Local Government Pension Scheme (LGPS) in response to the Fair Deal changes introduced in 2013.

This briefing will be of interest to:

a) Authorities and other bodies with staff in the LGPS, and

b) Service Providers (contractors and organisations which provide services to Authorities and/or other bodies participating in the LGPS, where those services involve the transfer of staff).

It is only relevant to England and Wales, although the Scottish Government (and when it starts functioning again, the Northern Irish Executive) may replicate these changes in respect of the Scottish LGPS and the LGPS for Northern Ireland.

Higher Education Institutions are not Fair Deal employers (as defined in the proposed new regulations).  While these changes will not automatically apply to any outsourcing arrangements they put in place, they can choose to adopt them in contractual arrangements.

While this is a consultation, draft regulations changing the LGPS have been published.  We expect these regulations to become law later in 2019, although there may be some revisions on technical points once the comments from the consultation are considered.

Key points

End of the broadly comparable scheme option

  • The option for Service Providers to use a broadly comparable scheme will end
  • Service Providers who take on employees in active membership of the LGPS from a Fair Deal employer will have to offer these employees continuing membership of the LGPS
  • Service Providers with transferred employees in a broadly comparable scheme will have to offer membership of the LGPS when a contract is next re-tendered
  • Transferred employees who rejoin the LGPS following a re-tendering will have a right to transfer benefits from the broadly comparable scheme to the LGPS. This will make use of the existing individual right to transfer into the LGPS using cash equivalent transfer value (CETV) factors in guidance issued by the Secretary of State
  • As a CETV is not the same as an actuarial equivalent, however, we are not certain that this will ensure a like for like conversion.  While there is reference to converting the transfer value to an amount of career average pension on an actuarially neutral basis, this may not reflect historic final salary pension benefits

Simplified participation in the LGPS to help facilitate risk sharing

  • Many Service Providers will be familiar with becoming an admission body to participate in the LGPS. The LGPS also permits Authorities to designate certain employers as deemed employers. This route is currently used in respect of schools where the legal employer is not the Authority (for example, Church of England Voluntary Aided Schools)
  • Authorities will be encouraged to consider whether the deemed employer route can be used instead of the admission body route. Tender documents should confirm which route an Authority is proposing
  • The deemed employer route potentially offers more flexibility for risk sharing options between an Authority and Service Provider. It does not have to follow the strict requirements of the admission body agreement. Risk sharing options will be set out in the contractual arrangements between the Authority and the Service Provider

Transfer of exit debts

  • For admission bodies, exit debts will no longer be automatically triggered when an LGPS employer is merged or taken over by another organisation. The successor body will automatically assume the liabilities, unless there is a specific reason for it not to do so

Timely consideration of pension issues encouraged

  • As Authorities will be encouraged to consider risk sharing deemed employer route options as well as the admission body route, the regulations will require an early consideration of pension issues. This will be reinforced in guidance

Immediate actions

Service Providers using a broadly comparable scheme should:

  • Note that this option will not be available for new contracts/on a re-tender
  • Start working with the scheme trustees to minimise any potential impact on the scheme if individuals take a transfer back into the LGPS
  • Start thinking about how they will operate LGPS discretions

Service Providers looking at new contracts or involved with re-tenders should:

  • Ensure that bid teams are made aware that Authorities will be encouraged to consider the deemed employer route, as well as the admission body route
  • Consider training bid teams about the different risk sharing opportunities which are available
  • Start developing in-house policies on risk sharing opportunities they can accept and risk sharing opportunities they should be asking for

Authorities should ensure that their procurement and tender guidelines are revised to ensure that pensions are an early consideration in an outsourcing opportunity.

How we can help

Our Pensions Team has extensive experience of helping Authorities and Service Providers with their pension obligations.  For more information, please speak to your usual contact.