Local Government Pension Scheme exit credits - where are we now?

Exit credits were first introduced into the LGPS in 2018, but unforeseen issues have since arisen in relation to the interaction between these provisions and existing outsourcing arrangements entered into on a “pass through” basis. New regulations have now been introduced retrospectively in an effort to remedy the problems encountered, though it will not be possible for LGPS funds to claw back payments already made under the previous provisions.

The problem

Public sector outsourcing arrangements commonly involve the outsourcing authority subsidising some or all of the contractor’s LGPS contributions during the contract period, and also taking on liability for any deficit which leads to an exit payment being payable at the point the contract ends.

However, in relation to arrangements entered into before the 2018 changes were introduced, the outsourcing agreement will make no reference to what happens if the contractor’s notional sub-fund within the LGPS is in surplus at the point of exit. This is unsurprising, since the payment of exit credits was not possible at the time that those arrangements were being negotiated. The net result is that the contractor may be able to claim a substantial exit credit from the LGPS fund, even though it has borne no pension risk during the term of the contract, and, in some cases, even where the surplus arises from contributions which have not been made by the contractor.

The MHCLG consultation

In response to the above problems, MHCLG issued a consultation in May 2019 in which it proposed retrospective amendments to the Local Government Pension Scheme Regulations 2013 (the “LGPS Regulations”) which would require an administering authority to take into account a scheme employer’s exposure to risk when calculating the value of an exit credit. In particular, if the contractor had not borne any pensions risk, but had become entitled to an exit credit, MHCLG considered that the exit credit should be nil.

The final outcome of the consultation was announced in February 2020, and has been implemented via the Local Government Pension Scheme (Amendment) Regulations 2020 (the “Amending Regulations”), which came into effect on 20 March 2020.

What do the new provisions say?

The Amending Regulations revise regulation 64 of the LGPS Regulations so that, although there is still provision for an exit credit to be paid, it is no longer the case that the exiting employer will automatically be entitled to a payment equal to the amount of any surplus revealed in an exit valuation.

Instead, the administering authority now has the discretion to determine the amount of an exit credit, and there is express recognition in the amended LGPS Regulations that the amount may be zero.

In exercising that discretion, the administering authority is required to have regard to the following:

• the extent to which there is an excess of assets in the Fund relating to the exiting employer over the liabilities in relating to that employer's current and former employees;
• the proportion of this excess of assets which has arisen because of the value of the employer's contributions
• any representations which are made to the administering authority made by the exiting employer and where that employer is an admission body, certain other bodies such as (for example) the LGPS scheme employer for whom the admission body is providing services
• any other relevant factors

Although not set out in the LGPS Regulations, in coming to its decision, the administering authority will also need to ensure it complies with its usual public law duties, which will require it to (for example) act reasonably, ignore irrelevant factors, and follow proper processes when considering the question.

As is evident from the above description, in contrast to the proposal in the original MHCLG consultation, the legislation does not expressly state that the administering authority is required to take into account the scheme employer’s exposure to risk when calculating the value of an exit credit. Nor does it state categorically that where the contractor has not borne any pensions risk, but has become entitled to an exit credit, the amount of that exit credit should be zero.

However, such factors are likely to be included in representations made to the administering authority; and in any event, if they are material, the administering authority will need to take them into account under the heading of “any other relevant factors”.

In addition, the original MHCLG proposal to give the legislation retrospective effect – about which many respondents to the consultation expressed reservations and/or concerns – has not made it into the final Amending Regulations unchanged. Whilst the revised provisions take effect on 14 May 2018 (the date on which the exit credits were first introduced), there is a transitional provision which carves out any exit credit that has already been paid on or after 14 May 2018 and before 20 March 2020.

Effectively, therefore, administering authorities have no power or obligation to revisit payments which have already been made; however, in cases where the exit credit (although due under the old provisions) has not actually been paid across, the legislation allows the administering authority to assess the amount due in accordance with the revised provisions.

The administering authority is also required to:

• notify its intention to make a determination on an exit credit to the exiting employer and any other body that has provided a guarantee to the exiting employer, and where the exiting employer is a para 1(d) admission body (which is usually the case on outsourcings), also to the outsourcing LGPS scheme employer
• pay the amount determined to that exiting employer within six months of the exit date, or such longer time as the administering authority and the exiting employer may agree. This is a welcome extension: the old LGPS Regulations incorporated a default time-limit of three months

What should you do now?

We recommend that each administering authority should:

• familiarise itself with the new legislation on exit credits
• prepare a policy on exit credits (however be careful not to fetter discretions by having a too rigid policy) and make this publicly available
• put procedures in place to enable representations to be made by contractors, scheme employers and other bodies in relation to exit credits, and ensure that there are procedures in place for taking these into account as part of the administering authority’s decision-making
• as a matter of good practice, document its decision-making in relation to exit credits
• review its admission agreements to assess whether these need amending in light of the new legislation. If these currently provide a contractual entitlement to an exit credit (reflecting the previous provisions) then these will need to be updated to reflect the new wording in the LGPS Regulations
• where the administering authority has draft admission agreements which are already under negotiation, assess whether the drafting of these needs to be revised before they get to the final stage and are executed and completed

Eversheds Sutherland are appointed to the Norfolk LGPS Framework panel and so, should you need urgent legal advice on any issues, we can be appointed through this panel without the need to go through further procurement.

Eversheds Sutherland has implemented its continuity plans with all employees working at home and, save for face to face meetings, continues to provide services as normal.

Public sector pensions podcast

For more information, listen to our recent public sector pensions podcast with Barnett Waddingham. This podcast focuses on two topics impacting our LGPS fund clients and employers within those funds: deferral of employer contributions due to COVID-19 issues and exit credits. We discuss what LGPS funds should consider when faced with an employer who is requesting to defer its employer contributions, deferral of contribution policies and agreements, the changes to the exit credit legislation and what this means for exits from the fund.