Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
Early estimates anticipated a rise for many employers, with some commentators estimating a £1 billion rise in contributions across all LGPS employers. Employers who are facing a rise in contribution rates from April 2017 will no doubt be considering their next steps.
Although indications might have been received, there may be some room for you to negotiate about some of the assumptions on which contributions are calculated, such as the expected rate of pay rises over the next three years, or the period over which a deficit is recovered. Successful negotiations may result in a reduction of the amount of rise in contributions.
If your organisation participates through an admission agreement, it may be possible to stop employees accruing future benefits or to close this to new joiners. This will stop the build up of future liabilities but benefits already earned will still need to be paid for. Most often, this will mean that you will have to make an exit payment to the pension fund, which can run into hundreds of thousands, or indeed millions, of pounds. Some pension funds may be willing to stage this payment with appropriate security being provided or to allow you, as the employer, to continue to make regular payments into the fund. Otherwise, employers in this situation will need to be able to find the money up front for this to be a viable option.
Ceasing to offer access to the LGPS will, of course, mean a change to the contracts of employees who are currently active members of the LGPS, which may not be straightforward:
- It may be possible to reach agreement to change, but consultation and negotiation will be required;
- It will also be necessary to check the terms of the admission agreement, as well as any staff transfer agreement, to see whether there are any restrictions on making changes;
- It’s also worth noting that if staff have previously transferred from another LGPS employer, this choice over, ceasing to offer this benefit, may be on the way out. Earlier this summer, the Government consulted about requiring employers of transferred staff to continue to secure access to the LGPS.
If you don’t participate in the LGPS through admission agreements, such as local authorities and academies, there is no choice available to stop employees accruing benefits in the LGPS. These employees will have a statutory right to become members of LGPS, meaning that you will need to find other ways of managing increased costs.
Some local authorities and academies may choose to do this by outsourcing services and the staff who deliver those services. Those staff who have transferred will need to be offered access to the LGPS but, as those staff leave, they can be replaced by new staff who don’t need to be offered access to the LGPS. The new staff could simply be offered access to an auto-enrolment scheme where employer contributions need not be more than 3%, although, in practice, even a more generous employer contribution could still result in a significant saving. Obviously, the cost of pension contributions will only be one factor in making a decision to outsource, but it will be a significant one.
Of course, it won’t be possible or even desirable to outsource some staff. LGPS employers will therefore also be looking to the 91 LGPS pension funds to deliver better returns on the contributions invested, with some authorities already being quite vocal about this. The Government previously consulted on a move to passive fund management (which would have substantially reduced both investment fees and transaction costs) and in-house management of alternative investments. It was estimated that these proposals would have saved £660 million a year and £6.6 billion over the next 20 years but, unfortunately, these proposals were shelved.
Now steps are being taken towards delivering better returns with the set-up of investment pools for LGPS funds in April 2018. The current 91 funds are joining together to form 8 pooled investment funds, each with at least £25 billion of assets. The aim is to reduce investment costs, with savings made through economies of scale and increased bargaining power. Hopefully, this will feed through into lower employer contributions too.
A further way for LGPS employers to manage costs is to ensure that you are appropriately managing your discretion to grant certain benefits. As an LGPS employer, you are required to have a policy that deals with how you exercise certain discretions and to review this regularly. In addition to this, a recent decision of the Pensions Ombudsman has indicated that employers will have discretion in some circumstances over the grant of ill health retirement benefits. This is an area where significant costs can arise, so this is welcome news if you are operating on tight budgets. However, caution will be required to avoid appeals against decisions being made and references being sent to the Pensions Ombudsman.
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