High Court spares council £6.5m in LGPS exit credit ruling

Enterprise Management Services had lost its contract with Northamptonshire and Daventry councils in 2018 after seven years providing waste management services. 

In 2019 it sued the councils for £6.5m, which it said it was entitled to as part of their exit credit scheme. The claim eventually fell on West Northamptonshire Council, which was created by a merger of the two councils earlier this year.

Whilst the potential of a windfall may have well been welcomed by some contractors, the key issue remains making sure that they are as protected as possible from pensions risk over the duration of the contract

Mike Richardson, LCP

Exit credits were introduced by the government in 2018 as payments to qualifying employers in the event that their Local Government Pension Scheme came into surplus during the lifetime of a contract. 

In their initial drafting they were similar to exit payments, Arc Pensions Law partner Kate Payne told Pensions Expert, in that “a payment obligation to the private sector contractor arose if a surplus existed in the LGPS with no regard for any risk sharing that might have been agreed between contracting parties before these regulations came into force”.

Fixing asymmetry

The 2018 regulations introducing exit credits, which were intended to fix the asymmetry of contractors being unable to access any surplus in the scheme, ended up creating asymmetry of their own, as contractors who had signed risk sharing agreements ended up being able to access the surplus without being exposed to deficit risk.

"It was realised that this might give rise to windfalls for private sector contractors who had agreed that the relevant local authority had assumed the pensions risk and so a retrospective amendment was made in 2020 to give a discretion to make exit credit payments rather than an absolute obligation," Payne explained.

The Ministry of Housing, Communities and Local Government amended the regulations in 2020 to give LGPS authorities “absolute discretion” in the awarding of exit credits, and the amendments were made with retrospective effect reaching back to 2018, thereby covering exit credits that would have been payable prior to the change.

EMS argued that it was owed £6.5m in exit credits under the 2018 regulations and sought judicial review of MHCLG’s amendments, but the High Court found in favour of MHCLG, upholding the retrospective effect of its 2020 regulations and sparing West Northamptonshire Council a hefty bill.

In a blog, Burgess Salmon partner Michael Hayles said: “The consequence of the court’s decision is that all exit credit payments, which have not already been settled, will fall to be dealt with under the 2020 Regulations. In practical terms this means that LGPS funds have a discretion over the amount of an exit credit (surplus payment).” 

He added: “As the amount may be zero, there is discretion whether to pay an exit credit at all”

Judgment provides clarity

Hayles said the judgment provided “helpful clarification” of the regulations amended by the government last year.

Among the key points noted by the judge were a requirement that LGPS funds “should make a rational and fair application of the legislation, giving their words their clear meaning”, he explained.

Additionally, when exercising discretion, they should have regard to “all the relevant facts of which they are aware, and consider all the relevant factors set out in the regulations — noting the regulations do not make any single factor conclusive”.

“Regard may always be had to the fact that by virtue of the regulations introduced, MHCLG provided for the possibility of exit credits, and that also the revised regulations inserted a discretion rather than an absolute entitlement,” he continued.

Finally, Hayles said the judge noted that the regulations “do not give 'primacy' to any single factor, and the weight given to any relevant factors will always depend on the circumstances of the individual case”.

LCP partner Mike Richardson said the court judgment “seems to have landed at a sensible place”.

“Whilst the potential of a windfall may have well been welcomed by some contractors, the key issue remains making sure that they are as protected as possible from pensions risk over the duration of the contract,” he explained.  

“Contractors therefore still need to be careful about pensions when taking on new local authority contracts, and there remains a lot of progress to be made by the government in implementing fully the proposed new Fair Deal provisions in the LGPS”.