The Ministry of Housing, Communities and Local Government (‘MHCLG’) has issued a partial response to its consultation on the Local Valuation Cycle and the Management of Employer Risk of 8 May 2019, specifically on the issue of exit credits. The response document summarises the responses received and details MHCLG’s revised proposals for changes to the rules on exit credits contained in the LGPS Regulations 2013, which have since been converted into amending legislation scheduled to come into force on 20 March 2020.

The issue: exit credits and outsourcing

In its consultation document (see our briefing on the consultation here), the government recognised that the introduction of exit credits (payable to a withdrawing employer where a surplus in the LGPS fund is attributable to them) had created unforeseen issues in an outsourcing context. Where, as part of the process of admitting a contractor to the LGPS, an administering authority had agreed to bear some or all of the contractor’s pensions costs and risk through a ‘pass-through’ arrangement, it was widely thought unfair for the contactor to benefit from a full refund of any surplus in the LGPS fund on exit. This, however, is a situation that has arisen in a number of cases since exit credits were introduced

The government’s initial proposals

The consultation document proposed to amend the LGPS Regulations 2013 to provide that administering authorities would be obliged to take into account any risk-sharing when calculating the value of an exit credit. An administering authority would have to satisfy itself that risk-sharing had taken place, and if the contracting employer had not borne any risk then the exit credit would be calculated as nil. It proposed that the changes should be retrospective, applying from the point when exit credits were first introduced in May 2018 (see our briefing on the introduction of exit credits here).

What has changed?

The response document states that the vast majority of responses were supportive of the consultation document’s proposals. However, a number of concerns were raised, in particular around the difficulty administering authorities would have in calculating appropriate exits credits given the wide range of possible risk-sharing arrangements, and the fact that administering authorities would not always have access to the full details of the agreement between the parties. Other concerns were raised about the fairness and practicality of applying changes retrospectively, and around the risk that administering authorities might become drawn into contractual disputes. A number of respondents also felt that administering authorities should have a discretion rather than an obligation to pay exit credits and should have the power to decide the amount of any credit.

In light of these concerns, the government has amended its proposals and published the LGPS (Amendment) Regulations 2020 (the ‘Amending Regulations’), which are scheduled to come into force on 20 March 2020. The Amending Regulations will make the following changes to the LGPS Regulations 2013:

  • administering authorities will be able to determine, at their discretion, the amount of any exit credit due, having regard to any relevant factors (but which specifically include the amount of surplus, the proportion of excess assets which have arisen due to the employer’s contributions, and representations made by employers party to an admission agreement)
  • the period in which an exit credit (when due) is payable will be extended from three to six months and
  • while the changes will apply retrospectively, meaning (based on the consultation response) any exit credits that have not been paid (even if due) shall only become due following the administering authority’s exercise of discretion, exit credits that have already been paid will not be recoverable.

MHCLG has also encouraged administering authorities to adopt a fair and reasonable policy on exit credits, which should be set out in their Funding Strategy Statement. This is not a requirement under the Amending Regulations, but administering authorities should take actuarial and legal advice on their approach as appropriate.

A promising solution?

This revised approach should prevent unfairness in those cases where there has been risk sharing, or a pass-through of pension cost and an exit credit would otherwise have been payable to an outsourcing contractor under the LGPS Regulations 2013, while also minimising the administrative and legal burden on administering authorities. While the introduction of discretion brings with it a risk of inconsistency, both within a single administering authority and between different authorities, the suggestion that administering authorities develop a clear, fair and reasonable policy on exit credits should promote a consistent approach.

Next steps

The government’s full response on the consultation will be published in due course. However, seemingly to prevent further exit credits being paid where contractors have borne little or no pensions risk, the Amending Regulations have already been put forward and will become law on 20 March 2020 unless successfully challenged by MPs.

The consultation response document (PDF) is available on the government’s website here. The Amending Regulations are available here.