Local Government Pension Scheme – tier 3 meeting with AON Hewitt

Finance directors met to feed into a review of tier 3 employers in the scheme being carried out by AON Hewitt.

26 February 2018

AON Hewitt is currently carrying out a review of tier 3 (admitted bodies) members of Local Government Pension Schemes (LGPS). It has distributed a survey to all tier 3 members and has held a series of meetings to gather further input.

Together with AON Hewitt, we organised a meeting to allow housing association finance directors to feed into the review. Some of the main themes addressed at the meeting are summarised below.  

Housing associations should be considered separately 

Tier 3 employers include charities, universities and colleges, as well as housing associations. Tier 3 employers are seen to pose a greater risk of default than scheduled bodies, like local authorities, which are backed by public funding. This perceived higher risk is often reflected in the form of higher contribution rates and payments compared to scheduled bodies.

Finance directors at the meeting argued that housing associations are heavily regulated, investment grade employers with strong balance sheets and asset bases, a zero default record and increasing surpluses. They therefore pose a much lower risk than other tier 3 employers. They also agreed that the actuarial process should specifically recognise housing associations’ strengths. This could be done by allowing funds to give housing associations a separate employer class so that their lower risk profile can be included in actuarial assumptions and taken into account when setting terms.

Uncertainty in actuarial treatment between funds and over time

Finance directors described feeling vulnerable to seemingly arbitrary changes in actuarial assumptions – often coinciding with the appointment of a different actuary – which have dramatically changed their organisation’s valuation and therefore contribution rate, usually for the worse.

Several finance directors report that when their stock was transferred, and they therefore took on responsibility for the pension scheme, they were not required to have a subsumption agreement or guarantee. However, this requirement was then imposed at a later stage. Others report being required to make additional contributions even though their funds were not in deficit, and large increases in assessed deficits upon revaluation.

This uncertainty was cited as the biggest disadvantage of remaining within the LGPS, as it poses a significant financial risk. Many housing associations do not have the capacity to engage consultants to respond to the actuarial assumptions which usually underpinned these fluctuations. It was agreed that some work to do this nationally would be useful, and that actuaries should be able to draw on existing information – such as credit ratings and regulations – in doing so.

Inconsistency of treatment between different funds

Housing associations report a wide variation in their treatment depending on which local fund they belong to. This is particularly strong in relation to communication. Some finance directors are very positive about the quality and accuracy of communications both they and employees receive from their funds. Examples of good communication cited at the meeting included newsletters, workshops, and prompt replies to enquiries.

Others, however, report that either they or their employees, or both, find communication very difficult, receiving little or no information, waiting three or four months for replies to queries, or receiving inaccurate information which they then have to query.

For more information about the meeting and its outcomes, please contact Will Jeffwitz