DLUHC rules out requirement for LGPS to provide life assurance AVCs

LGPS members have only two options when it comes to increasing their benefits: they can buy an extra pension or they can build up further benefits by making AVCs.

The AVCs are made through a contracted AVC provider such as Prudential, Standard Life, Scottish Widows, Aegon, Legal & General or Clerical Medical; and these deduct AVCs from members’ pay before tax, providing tax relief. It is thought between 3 and 5 per cent of LGPS members have such an arrangement.

However, LGPS funds have of late reported a number of issues with their AVC providers, and there has been some debate as to whether life assurance AVCs have to be provided for in the first place.

Prudential, one of the AVC providers, reported itself to the Pensions Regulator after IT issues and Covid-19 disruption saw customers experiencing long delays when trying to take out their AVCs.

Uncertain regulations

An agenda item tabled by Leicestershire pensions manager Ian Howe, for discussion at a National LGPS Technical Group meeting on June 17, explained that it was “becoming increasingly difficult for authorities to undertake a meaningful market review when there are so few AVC providers in the... market, particularly when those providers are not bidding for new contracts. 

“The performance of one of the key players in this market continues to cause problems, but the ability to move away from them will be restricted if authorities are required to provide life assurance AVCs.”

Furthermore, he said there appeared to be no provision for members to transfer their AVC funds from one provider for another, which represents “yet another barrier to authorities changing AVC providers”.

“It also causes issues where employers start using salary sacrifice shared cost AVCs as ‘technically’ any previous AVC funds cannot be transferred to the shared cost AVC fund,” he said.

He asked the technical group to consider whether it was necessary to press the Scheme Advisory Board for a change to the regulations.

Howe explained that, though the Local Government Association believes the requirement to provide life assurance AVCs is “outdated”, they “think it is still required by regulation 17”.

Though the overriding statutory requirement was removed as part of the Pensions Act 2004, statutory regulations governing the LGPS retained the requirement to provide an AVC scheme. 

LGPS regulations appear to prescribe “that an active member must specify whether any of the contributions are to be used to provide life assurance benefits payable upon death in service and, if so, the proportion or amount to be so used”.

No requirement for life assurance AVCs

The LGA referred the matter to the DLUHC, which consulted with its lawyers. 

Their response was shared in a bulletin from the Local Government Pensions Committee following the June meeting. It confirmed that there is no requirement to provide life assurance AVCs under the 2013 LGPS regulations.

“With the usual caveat that interpretation of law is ultimately for the courts, our lawyer does not think that the provisions in regulation 17 would require life assurance benefits to be offered by administering authorities,” they said. 

“He considers it more likely that the regulation would be phrased to explicitly require this if that was the case, and that paragraph (3)(b) is a more general provision if a member wants to buy life assurance benefits (and that is available to them).”

The bulletin said administering authorities should “take on board DLUHC’s view when undertaking a market review of AVCs”.