LGPS authorities expected to justify new pension powers

The Ministry of Housing, Communities and Local Government issued new guidance on Tuesday clarifying that when using the new powers granted in late 2020, local authorities will need to consider all the key factors pertinent to the decision, including taking actuarial and other forms of guidance and advice into account.

The new powers were aimed in large part at addressing problems with amendments to LGPS regulations made in 2018 that introduced exit credits that would allow employers to reclaim money from the scheme if they could show they have overpaid benefits against the cost of buying out their portion of liabilities with an insurer.

Chief among these problems was a loophole whereby local authorities could outsource functions to private contractors while protecting them from having to pay contributions above an agreed level, repair deficits or pay exit fees in exchange for a better price.

The MHCLG began consulting on a remedy for the situation in 2019, and has to date published two partial responses. The full consultation response remains outstanding.

In its second partial response in September last year, the ministry pledged to hand out powers to change employer contributions outside the usual valuation cycle — for instance, where there has been a significant change in their liabilities or covenant position, as well as the ability to request a review of contributions from their administering authority.

The MHCLG also pledged greater flexibility in exit payments, allowing an administering authority to defer the triggering of an exit payment for a fund employer where the authority deems this appropriate, and granting the ability to spread an exit payment over a period of time.

It further laid out a new deferred employer status, as well as deferred debt arrangements. In return for an ongoing commitment to meet their existing responsibilities as employers in the scheme, administering authorities can allow an exiting employer to defer the exit payment where they have no active members. 

In its latest guidance, the MHCLG stated that authorities wishing to review employer contribution rates between valuations will need policies including an indicative timetable for review, monitoring employers and their circumstances following a change in their contribution rate, and imposing requirements on employers to provide information that will allow the authority to monitor covenant changes.

Those authorities looking to spread exit payments will have to be able to show that they have considered the appropriate length of time over which to spread the exit payment, collect evidence from the employer before it can consider spreading the exit payment, and its approach to monitoring any spread exit payments.

They will have to seek appropriate actuarial, covenant and legal advice.

Authorities that look to set up a deferred debt arrangement will likewise be expected to collect evidence from and monitor employers party to the agreement, as well as to set out circumstances under which the agreement may be terminated.

They will also have to show how the costs of the deferred debt arrangement have been calculated, and how they will be met.

The guidance added that should a dispute arise that relates to these new powers, “we anticipate the normal mechanisms for resolving these, including the LGPS internal dispute resolution procedures, would apply”.

“An additional guide for employers and administering authorities on the practical application of the new powers is to be published by the LGPS Advisory Board for England and Wales,” it stated, adding that administering authorities are advised to consider both documents when developing policies in relation to the new powers.