A Manchester-based waste management company has brought a claim to the High Court against Tameside Metropolitan Borough Council over an alleged £13m exit credit due from the Local Government Pension Scheme.
According to news service LexisNexis, Viridor Waste is seeking the payment alongside an actuarial valuation of its share of liabilities in the Greater Manchester Pension Fund.
Viridor, which has had contracts with Tameside since at least 1995, saw a new waste management company take over in May 2019, after its agreement with the local authority ended.
Until then, its employees participated in the GMPF, which has assets worth £23.8m and 370,000 members.
Their request for an actuarial valuation of their section of the GMPF at cessation showing the assets and liabilities relating to their current and former employees does seem to be in line with the legislation
Bart Huby, LCP
Viridor’s claim stated that under LGPS rules, if a company ceases to be a pension scheme employer, whoever is administering the pension fund must obtain an “actuarial valuation as at the exit date of the liabilities of the fund in respect of benefits in respect of the exiting employer’s current and former employees”.
The waste management company also argued that it should be given a certificate showing if it owes any payments or is due any credits related to those benefits. It estimates that it is due about £13m back from the pension payments it made.
“The defendant has failed to comply with its obligations to obtain an actuarial valuation or a revised rates and adjustments certificate as aforesaid, and has failed to pay the exit credit thereby found due,” the claim stated. Those communications include a demand letter for payment in October 2019, it said.
Tameside Metropolitan Borough Council has been approached for comment.
Exit payment rules changed two years ago
In 2018, the government made changes to LGPS regulations to allow employers to reclaim money from the scheme, if they can show they have overpaid against the cost of buying out their portion of liabilities with an insurer.
Known as exit credits and introduced in May last year, the payments were introduced to reconcile an imbalance where employers would be liable for any exit payment if they were in deficit and wanted to leave the scheme, but could not retrieve any overpayments.
Bart Huby, partner at LCP, noted that Viridor’s claim seems to be in line with the intention of the exit credit legislation introduced for the LGPS in 2018.
He said: “The aim of this change was to remove the asymmetry that existed at the time that meant that if an employer ceased participating in an LGPS fund when its section was in deficit, it had to pay off the deficit – but if there was a surplus, it gained no benefit.
“This asymmetry meant that participating employers were often reluctant to fully fund their sections of LGPS funds, because any overfunding would be lost on contract termination, and so were generally keen to keep their contributions as low as possible.”
By enabling employers to benefit from a surplus on cessation, the new legislation removed this disincentive.
Mr Huby said it is not clear in this case, from the particulars of the claim, how Viridor has come to the conclusion that its section was in surplus to the tune of £13m.
“But their request for an actuarial valuation of their section of the GMPF at cessation showing the assets and liabilities relating to their current and former employees does seem to be in line with the legislation,” he added.
Legislation created loophole
Despite this change in the legislation for LGPS funds bringing fairness to relationships with employers, some contractors have been benefiting from an unintended loophole created by the new rules.
Pensions Expert reported in January that it was common for local authorities, when outsourcing functions to private contractors, to protect them from having to pay contributions above an agreed level, repair deficits or pay exit fees in exchange for a better price – known as ‘pass-through’ arrangements.
Hertfordshire LGPS employer agreement sidesteps cessation debt
A housing association has avoided a potentially crippling £3m cessation debt to the Local Government Pension Scheme via an innovative agreement with the scheme’s local administering authority.
This means some companies can now claim payouts from the LGPS, despite having borne none of the risk associated with funding the scheme.
The Ministry of Housing, Communities and Local Government is aware of the situation and, in a policy consultation launched in May 2019, proposed a solution for the issue, allowing councils to take into account a scheme employer’s exposure to risk when calculating an exit credit.
However, the government has not yet published its response to the consultation, which is expected in the coming months.
