Recent developments mean employers may have more options for managing Local Government Pension Scheme (LGPS) assets and liabilities in their fund, including on closure to future accrual. New legislation gives more opportunity for employers to make their case for flexibility in the LGPS. But with more choice, the LGPS has become a bigger risk to an organisation and one that needs to be managed.
We consider below the LGPS guidance due out and the possible impact for housing associations.
The Ministry of Housing, Communities and Local Government (MHCLG) held a consultation from May to July 2019 on proposals to amend the LGPS. The government published a partial response in August 2020 which covers:
1. Flexible review of employer contributions between valuations
2.a. Flexibility on exit payments – Spreading exit payments
2.b. Flexibility on exit payments – Deferred debt arrangements
Regulations came into effect on 23 September 2020.
MHCLG and the LGPS Scheme Advisory Board (SAB) were then tasked with providing legislative and practical guidance for funds which is due out in early 2021. The NHF was part of the SAB working group representing the interests of the housing sector. Isio was also asked to join in order to represent housing associations and employers more generally.
A fund now has the ability to review a contribution schedule between valuations. This may be because an employer’s circumstances change between valuations, for example workforce composition, or an employer’s covenant risk changes, for example, it is unable to meet future obligations.
Administering authorities have the power to review contributions if there is a change in liabilities of an employer, a change in employer covenant, or on an employer’s request. Importantly, market movements alone are not a basis for change.
This is welcome news as it is not unduly restrictive for employers. The balance of power means that employers can request this as well as a fund. It sets the path towards employers and funds addressing investment risk, funding risk and covenant as one, in order to arrive at a funding strategy which makes sense for fund and employer. This is often referred to as ‘Integrated Risk Management’.
There is a risk for housing associations that funds see this as tool they can use when they want. There is also an opportunity, however, for employers to engage with their fund proactively and use the principles of integrated risk management to start to influence their own funding approach.
To date, an employer has been required to pay an – often significant – one off lump sum payment on exit unless a legal side agreement has been put in place. This means that employers may act against long term interests and keep active members in the LGPS purely to avoid this cost. There is also an insolvency risk for employers.
The legislation allows for exiting employers to be able to spread exit payments over a defined period, or to defer the exit payment by entering into a deferred debt arrangement. Employers’ responsibilities will be the same as those with active members except there will no longer be a requirement to pay primary contributions.
There are a number of considerations for a fund and employer if agreeing such an arrangement, including time period, risk and calculation basis, investment strategy, security required and accounting treatment.
This is a welcome move towards a pragmatic view with transparent policies. It is still on a discretionary basis, however, and some funds are unlikely to adopt in full. A fund may apply a calculation of deferred debt payments, for example, which is prohibitive to an employer. Housing associations will need proactive engagement in order to make the most of the flexibilities.
We are due statutory guidance from MHCLG in early 2021 which should include:
And SAB guide to employer flexibilities is also expected in early 2021:
The fund will then consult on policy including a consultation with employers. Employers are expected to be able to make use of flexibilities from mid-2021.