On 26 August, the Government issued another partial response to the “Changes to the Local Valuation Cycle and the Management of Employer Risk” consultation issued in May 2019. This is the second partial response, this time focussing on flexibilities for employers in the LGPS and contributions payable.
"Additional flexibilities for employers has been something Barnett Waddingham have championed for a while and therefore we welcome the proposals as set out in the consultation. This is now even more desirable in the current environment where employers are dealing with the pressures COVID-19 has brought around affordability and cashflow. We are pleased to see agreement to the introduction of spreading exit payments, deferred debt arrangements and the ability to review contributions outwith the triennial valuation cycle."
The Government response suggests that contribution reviews should be available when an employer sees a significant change in liabilities and/or covenant but that an employer can make a request for a review at any time. Funds will need to carefully consider when they are comfortable to review an employer’s contribution rate in between valuation dates and therefore a clear policy will be needed in their Funding Strategy Statements. It’s important that employers understand this policy to avoid inappropriate requests and also that any costs should be met by the employer.
There was overwhelming support for additional flexibility on exit payments. This will allow employers to spread any exit payments over a period of time, as agreed with and at the discretion of, the administering authority so as not to expose other employers in the fund to additional risks. It also addresses the issue of the “too expensive to stay in, too expensive to get out” problem that many employers faced. Therefore, having clarity around this will help funds to manage their employers with unaffordable exit debts and to help those employers where it is simply impossible to pay off these debts as single payments. It was previously unclear whether this new policy would only apply to employers exiting on a specific “buy-out” or minimum-risk type bases, but it appears that this approach can be applied to any employer.
Deferred debt arrangements
Deferred debt arrangements will allow employers to continue to participate in a fund without any active members. These arrangements are already well established in the private sector for multi-employer schemes and responses to this element of the consultation were also strongly in favour. In fact, it has been the cause of debate in the LGPS community as it wasn’t clear whether these types of arrangements were possible under the existing Regulations and there are some of these arrangements already in place. They differ to spreading of exit payments as the value of the debt can be revisited with payments adjusted accordingly and so will require more regular monitoring , and their existence would remain subject to the ongoing agreement of the administering authority.
Flexibility and consistency
Although these policies should give employers additional flexibilities, it will still depend on individual funds to set out their policies to the new flexibilities in their Funding Strategy Statements. There is a clear desire from employers for consistency between funds but without further guidance it will be possible for funds to take different views to implementation. Help is being sought from the Scheme Advisory Board (SAB) and CIPFA to develop some guidance but with administering authorities wanting any guidance to not be too prescriptive, striking a balance between the two could be difficult.
From the original consultation, that still leaves unanswered questions about whether funding valuations will move from a triennial cycle to a quadrennial cycle and the introduction of full fund interim valuations. Whilst less frequent valuations might make sense for unfunded schemes – no assets to misbehave – it makes even less sense than it did when first proposed for the funded LGPS due to all the uncertainty that lies ahead. It may be that we need to wait and see how the 2020 Scheme valuation goes before they respond to these questions. The issue also still remains about relaxing requirements for FE colleges, sixth form colleges and HE corporations offering LGPS benefits to new joiners.
Draft regulations are not ready yet but the response promises them soon so we hope to see these in force before the end of the year. Some funds have been waiting for these regulations to be put in place so the key question for funds will be, what progress can they make with individual employers in the meantime who have been waiting for these changes to come into force?