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New regulations came into force on 23 September 2020 providing LGPS (Local Government Pension Scheme) employers with flexibility on meeting exit payments and LGPS funds with the flexibility to review employer contributions between valuations. These changes have the potential to help employers who feel trapped between rising liabilities on the one hand and a large exit payment on the other hand.
Review of contributions
The government has given administering authorities of LGPS pension funds the ability to review employer contributions in between three-yearly valuations in three circumstances:
- where there has been a significant change to an employer’s liabilities;
- where there has been a significant change in the employer’s covenant; and
- where the employer requests a review.
The government has made clear that market volatility or changes in asset values would not be a proper basis for the use of this new flexibility.
This would enable LGPS funds to respond to circumstances where the employer's liabilities substantially reduce or increase because of a TUPE transfer or local government re-organisation or where an employer's financial strength weakens materially. It also allows employers to request a review. The government has suggested that the potential impacts of Covid-19 might be a circumstance leading an employer to ask for a review.
Flexibility on exit payments
The government has recognised that employers may feel trapped into accruing further liabilities in the LGPS that they cannot really afford because they are also unable to afford the exit payment that would fall due if all employees stop accruing benefits. Whilst some LGPS funds already allow this sort of arrangement, the government wanted to put this on a formal footing.
The government has therefore introduced deferred debt arrangements (DDAs) which allow employers to defer an exit payment and to pay this off over time by way of continuing contributions. This has the potential to allow employers who want to reduce their liabilities to do so without risking insolvency or a substantial impact on their operations caused by a large exit payment.
There are a number of points to note about the new DDAs:
- it is at the LGPS pension fund's discretion whether to offer the DDA but they are required to set out a consistent approach to the exercise of their discretion in their funding strategy statement;
- the DDA must be for a fixed period, although this can be changed by agreement between the fund and the employer;
- the agreement will terminate if the employer becomes insolvent, is taken over or amalgamates - unless the fund is satisfied that there is no significant weakening in the employer's ability to continue to pay contributions; and
- the fund may terminate the agreement if it forms the view that the employer's ability to pay contributions has weakened materially or is likely to weaken materially in the next 12 months.
This new arrangement substantially mirrors arrangements introduced for private-sector pension schemes in April 2018 so we already have experience of negotiating these sorts of agreements in relation to private sector schemes.
For more information
For advice in relation to deferred debt arrangements (DDAs) or options for managing liabilities in the LGPS, contact Doug Mullen.
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