This legal update provides a summary of the key changes to the Local Government Pension Scheme proposed by the Government in a recent consultation paper.

Key proposals

On 27 May 2016, the Department for Communities and Local Government published a consultation paper on proposed changes to the LGPS.

The key proposals under consultation are changes to the LGPS Regulations to allow for the introduction of “New Fair Deal” principles where local authority staff are compulsorily transferred to a private sector employer, such as on an outsourcing from local government to a private service provider. The new Regulations would also make changes to money purchase benefits under the LGPS, allow for “exit credits” to be paid to leaving employers, and limit cases of automatic aggregation of benefits. The consultation closes on 20 August 2016.

New Fair Deal principles

Under the proposals, the current pension protection afforded to local authority staff who TUPE transfer to the private sector (through the Best Value Staff Transfers (Pension Direction) 2007) will be changed so that the “broadly comparable” option - whereby the new employer can provide broadly comparable pension benefits to the LGPS under their own private pension arrangement - will end.

Instead new employers will be required to participate in and contribute to the LGPS and the transferring staff will maintain their LGPS membership. For transferring staff who are eligible for the LGPS but have not yet joined, eligibility will continue with the new employer. In relation to retenders of contracts where employees are already in a broadly comparable pension scheme, the new Regulations would not require the new employer to participate in the LGPS, although such an employer could seek admission to the LGPS and is likely to be granted this.

The proposed changes are consistent with "New Fair Deal", a government policy which sets out how HM Treasury expects contracting parties to secure pension protection on an outsourcing from central government and stipulates that, where possible, continued membership of public sector pension schemes should be provided on a TUPE transfer.

Pension flexibilities, exit credits and aggregation

Other key proposals in the consultation paper are changes to money purchase benefits under the LPGS, designed to give members access to the pension freedoms that the Government announced in the 2014 Budget, the introduction of “exit credits” payable to exiting employers, and changes to the automatic aggregation of benefits.

Under the exit credits proposal, where an employer exits the LGPS as a result of it ceasing to employ active members, administering authorities of the LGPS would be required to pay a credit to that employer where there is a surplus in respect of the employer’s pension liabilities. Currently, exit payments can only be made one way – from the employer to the LGPS where a deficit exists.

Under the current Regulations, aggregation of benefits accrued by LGPS members during different periods of employment happens automatically in certain circumstances. The new Regulations would reduce the circumstances under which automatic aggregation occurs.

View the full details of the consultation.