The Deputy Pensions Ombudsman (DPO) has recently upheld the decision by East Riding of Yorkshire Council (East Riding) to increase Thomas Ferens Academy’s LGPS employer contribution rate from 20% to 43.3%.

East Riding’s Approach

On conversion, administering authorities are required to set the employer contribution rate payable by the Academy.  It does this by comparing the long term cost of pension benefits (liabilities) to the assets available to pay for those liabilities.  

As is commonplace on conversions, the Academy inherited liability for all of the benefits of the transferring staff that had already been built up in the East Riding Fund.  If the same approach had been taken in relation to assets, the Academy would have been credited with the same notional assets which had, prior to conversion, been credited to the Council in relation to those same benefits.  Given that the East Riding Fund was underfunded, that would mean that there was a deficit on conversion, but this would be the same deficit as existed prior to conversion.  

However, East Riding took a different approach; it “held back” notional assets sufficient to fully fund the Council’s deferred and pensioner liabilities for employees who had previously worked at the school, and who would not transfer to the Academy.  This drastically reduced the notional assets available to credit to the Academy.  As a result, the funding deficit on conversion was greater - by an order of magnitude -  than it would otherwise have been. 

Beware the “discretion”

The Academy argued that East Riding had acted unreasonably and unlawfully. However, the DPO upheld East Riding’s approach, saying that this was one of a whole range of methodologies which a reasonable administering authority could have used, and so it acted within its legal powers.  This was the case even though the approach was not described in the Funding Strategy Statement for the fund.  

Avoiding surprises

Maintained schools considering conversion need to be aware that administering authorities will be emboldened by this decision.  There will be no room for negotiation over the approach taken, so all you can do is be informed and prepared:

  • Understand the administering authority’s approach to asset allocation prior to conversion
  • Don’t just assume that the approach is the one described in the Funding Strategy Statement
  • Get them to confirm what your employer contribution rate will be prior to conversion
  • Work out how you are going to finance that rate, and if there are going to be difficulties with this, raise it with the EFA well ahead of conversion

Converted academies should also be live to the fact that an administering authority has a broad discretion to take into account whatever factors it considers relevant when setting employer contribution rates, including following a triennial valuation.