In May 2018, the Government introduced the right for employers who left the Local Government Pension Scheme (LGPS) when there was a surplus on their pension liabilities to receive an exit credit. Unfortunately, they hadn’t anticipated that risk-sharing arrangements already in place meant that some employers were therefore receiving a windfall – getting all the benefit of the exit credit having taken limited or no risk. 

The LGPS (Amendment) Regulations 2020 (2020 Regulations) removed the automatic right for employers leaving the LGPS to be paid an exit credit (provided, of course, the fund was in surplus for that employer), instead giving the administering authority a discretion to award such a payment. The 2020 Regulations were challenged by contractors who had lost out on receiving exit credits. However, the High Court has confirmed that the 2020 Regulations were lawful.

The 2020 Regulations
The 2020 Regulations came into force in March 2020 but had effect from 14 May 2018, the date on which the automatic right to an exit credit payment was granted. This effectively removed any historic right to an automatic exit credit payment that had not already been made.

Given that exit credits worth tens of millions of pounds were at stake, a challenge was inevitable.

The challenge: Amey and Enterprise Managed Service Ltd v Secretary of State of Housing, Communities and Local Government
Enterprise Managed Service Ltd (EMS) became an admission body in 2011, after entering into an outsourcing agreement with a local authority. EMS entered into a pass-through arrangement.

When EMS’ contract with the local authority ended in June 2018, there was a surplus of approximately £6.5 million. However, Northamptonshire County Council (the administering authority for the admission agreement) refused to pay the exit credit, arguing it was an unfair windfall since EMS did not take on any pension risk. EMS brought legal proceedings to challenge Northamptonshire County Council but these were stayed when the 2020 Regulations removed the automatic right to an exit credit payment.

Amey (EMS’ parent company) and EMS brought their challenge on the following grounds:

  1. By removing the automatic payment of exit credits, the 2020 Regulations had infringed EMS’ right to a fair trial against Northamptonshire County Council to enforce payment of the exit credit.
  2. The 2020 Regulations infringed EMS’ property rights by removing its rights to an exit credit payment in respect of a contract that had actually expired before the 2020 Regulations came into force.
  3. The discretion given to administering authorities should take into account that a contractor may have provided a discount on the contract price in return for not taking on any pension risk.

The decision
In respect of the first ground, the High Court held that the 2020 Regulations were correcting a policy error. Automatic exit credit payments had allowed exiting employers to receive payments equal to or, in some cases, above the amount of contributions made by that employer. It also caused a risk of future deficits in the scheme, which could lead to both the LGPS being unable to provide pension benefits and to public money being spent to top up any deficit.

The court, therefore, held that the 2020 Regulations did prevent EMS from pursuing a claim against Northamptonshire County Council but there were strong public interest reasons which justified the interference of EMS’ right to a fair trial.

In respect of the second ground, the High Court also held that the retrospective amendment made by the 2020 Regulations was a proportionate means of achieving a legitimate aim in the public interest.

In respect of the third ground, the High Court confirmed that the decision-maker must, in deciding whether to exercise the discretion to award an exit credit payment, make a rational and fair application of regulation 64 of the LGPS Regulations 2013. This means the decision-maker should take into account all relevant circumstances and not operate a blanket policy of refusing to pay exit credits in some circumstances. The weight given to any relevant circumstances should be considered on a case-by-case basis.

With quite a number of decisions about exit payments outstanding pending the outcome of this decision, this decision brings clarity to contractors, LGPS Funds and authorities letting contracts. We also understand that the decision is not going to be appealed.

Helpfully the court did provide some guidance to LGPS funds about what approach they should take to awarding exit credits:

  • There is no single factor that is conclusive;
  • The decision-maker needs to take account of all relevant factors (and, by implication, take no account of any irrelevant factors);
  • The weight given to any factor will depend on the circumstances of the situation;
  • Decision-makers will need to bear in mind both that the regulations envisaged that an exit credit would be paid in some circumstances but not in every circumstance;
  • LGPS funds should not operate a blanket policy of granting (or not granting) exit credits; and
  • Specific consideration should be given to the factors set out in the regulations.

What this means in practice is that where there are risk-sharing arrangements already in place, it is much less likely that an exit credit will be awarded to a contractor who has taken little or no risk. Even where an exit credit is awarded in these circumstances, it is likely to be less than the full amount of a surplus to reflect the fact that the risks of the arrangement were not mainly borne by the contractor.

Given the sums involved, we anticipate that letting authorities and contractors are still likely to spend considerable time and energy making representations about whether exit credits are awarded.

For authorities letting contracts, it would be sensible to consider including specific provisions in the contract dealing with what will happen where an exit credit is paid to the contractor.

For more commentary on this decision, listen to our podcast here.

For more information

For advice on whether to exercise the discretion to make an exit credit or on making representations about an exit credit, contact Doug Mullen or Alice Kinder.