Returning surpluses - employer exit credits arrive in the LGPS

Estimated reading time: 3 minutes

Changes to Regulation 64 of the Local Government Pension Scheme (LGPS) Regulations 2013 will offer greater flexibility; providing the return of any surplus assets in the form of an exit credit. Annemarie Allen, Associate and Senior Pensions Consultant provides some insight on what has changed and what this means for scheme employers and administering authorities.
"Scheme employers should check side agreements and may require legal advice on their amendment. "

The change to Regulation 64 provides more flexibility for administering authorities to manage liabilities when scheme employers cease to have active members in their Fund. Previously, any surplus has been retained in the Fund upon cessation.

It is included in the new LGPS (Amendment) Regulations 2018 which finally emerged on 19 April in response to a previous consultation which had closed in August 2016. The regulations have been laid in Parliament and come into force on 14 May 2018.

While some provisions have been backdated to 1 April 2014, this particular provision has not; effective from 14 May 2018, this has created a “cliff edge” for employers ceasing either side of the date, but avoids the many complications that backdating would otherwise have caused. The provision is expected to prove popular with employers participating after this date.

How will the provision operate?

In our response to the draft regulations, we raised some concerns - some of which have been addressed and others not:

  • The provision enabling an administering authority to suspend a requirement to pay an exit payment for up to three years when they believe the employer is likely to have one or more active members within the suspension period has not been extended to include exit credits, meaning that a payment will be triggered even when a new member may join a few days later.
  • The timespan in which the payment must be made has been extended from one month after cessation of the employer to three months. We had suggested a longer period; although the ability for an employer and administering authority to agree to extend the period has been retained, in practice three months will be a challenge and the pressure will be on. Both employers and administering authorities will need to provide and process final member information promptly, and allow sufficient time to obtain and consider a report from their actuary.
  • Mirroring the exit payment provision, a clause has been added to ensure that once paid, a further exit credit cannot be paid out. Interestingly, regulation 25A of the LGPS (Transitional Provisions, Savings and Amendments) Regulations 2014 has not been amended, leaving open the question of whether payment of a future deficit emerging can be requested.
  • Finally, the regulations do not make clear when an employer participates in the same Fund more than once, whether they are treated as a separate or the same employer, and consequentially how this new provision should be applied. We anticipate interesting conversations emerging where an employer is both in surplus and in deficit in one Fund.
"Administering authorities should review processes and procedures and ensure that employers understand the need for prompt provision of accurate leaver details."

What should scheme employers do now?

Scheme employers should now check any side agreements in place and may require legal advice on their amendment to prevent any unintended situations arising where surplus assets are returned directly to the ceasing employer under this new provision.

What should administering authorities do now?

Administering authorities should review processes and procedures and ensure that employers understand the need for prompt provision of accurate leaver details for active members in order to achieve the tight timescales for payment out of surplus assets. 

Administering authorities should also remember the provision in regulation 64(4) which enables them to obtain a certificate from their actuary adjusting the employer contributions - with a view to providing assets equivalent to any exit payment to the Fund by the exit date, which may still remain an attractive option to run a surplus down over the preceding years.

Finally, they should also review and update their Funding Strategy Statement in discussion with their Actuary. Our exit credit briefing note will explore the actuarial aspects of this new provision and we will also be contacting our clients individually to discuss this further.

For more information on the 2018 regulations, and what they mean to you – look out for our full briefing note.