Deficit management under the Local Government Pension Scheme
Employers who participate in the salary-related Local Government Pension Scheme (LGPS) are considering how best to manage their liabilities under that scheme.
The LGPS is a 'funded' public sector pension scheme. By that, we mean that the employer is primarily responsible for making sure that the funding of the scheme is sufficient to meet the 'pensions promise'; namely the retirement benefits for current and former employees of the employer.
Where there are insufficient assets attributable to that employer to meet the pensions promise, a deficit can arise. This can lead to a request for increased employer contributions and a potential escalation in any 'exit payment'.
Where employers, including housing associations and charities experience this, the combination of a substantial pensions deficit, a hike in contributions and rigid LGPS regulations can lead employers to seek advice on how best to manage their liabilities.
Employers are now looking to address these risks by entering into deficit management plans and manage their LGPS funding exposure:
- A deficit management plan can be set up with the LGPS administering authority.
- Employers cease active membership for staff but remain as an admission body.
- There is no debt to be paid at that point because the employer remains in the LGPS.
- The LGPS administering authority agrees alternative arrangements for the employer to meet its pension deficit.
- Suitable security, such as a legal charge over the employer's property can be required.
Our team can help by:
- Advising on the legal requirements for entering into a deficit management agreement.
- Drafting the deficit management agreement and negotiating the terms with the LGPS authority's legal and actuarial advisers.
- Drafting and advising upon any security which will be provided by the employer to the LGPS administering authority.
The Trowers' pensions team have advised on a number of deficit management agreements to date, and is currently advising three other employers in relation to this exercise.
Trowers Top Tips on LGPS deficit management agreements:
- Make sure you ask your lawyers to review the terms of any historic LSVT agreements you have entered into.
- Review your employees' contract of employment to establish any entrenched rights to LGPS provision.
- Seek actuarial advice in order to understand what funding approach you might be able to pursue, and what strategy you might be able to agree.
- Establish early on whether any properties you own, which you will offer as security to the administering authority, have any encumbrances or restrictions on them which you will need to address before being able to grant them as security.
We tweet #TrowersTopTips or #FutureOfWork @TrowersFuture