LGPS employer exit myth-buster: “Can’t afford to stay, can’t afford to leave”
Finding the LGPS exit door
31 Jul 2017 - Estimated reading time: 5 minutes
Local Government Pension Scheme Funds are not in the business of putting employers out of business. We hear comments about how some employers find the LGPS “too expensive to stay in, but too expensive to leave”; the reality however, is that it’s not as bleak, or as black-and-white as that.
For most admission bodies, there is a middle way between forced membership and expensive departure. In our experience, Funds are happy to assist in a managed exit by an employer. Read on to see how the above myth can be busted.
There are many admission bodies (sometimes referred to as “Tier 3 employers”) in the LGPS including housing associations, charities, some colleges, and other organisations providing local services.
Because these employers don’t have to be in the LGPS, they always have the option to cease participation (subject to their employees’ contracts, employment law requirements, etc). Typically, however, there will be a significant “walk away” price to pay in the form of a cessation debt. As a result, many Tier 3 employers continue their LGPS participation to avoid such a high cessation debt, which of course builds up further liabilities and can make the “walk away” price even higher.
We recognise that the LGPS can be a material ongoing cost for such bodies, and we know this is a difficult situation for both the Fund and the employer. We also hear some commentators alleging this is an impossible situation and the LGPS is being inflexible: we think there are a couple of myths here.
Myth 1 busted: an impossible situation?
If a Tier 3 employer considers both remaining and ceasing from the LGPS to be too expensive, an alternative route is certainly available. We refer to this as “managed exit”.
The precise terms of a managed exit will need to be agreed between the employer and the Fund, and will typically:
- allow the employer to cease its active membership over an appropriate timescale (i.e. tackling the “can’t afford to stay” issue); and
- avoid an immediate cessation debt being payable by the employer (i.e. addressing the “can’t afford to leave” perception).
This “win-win” arises because the Fund usually gets more security from the employer (e.g. via a charge over assets) whilst the employer avoids large cessation debt payments and can manage its LGPS costs over a longer time horizon. And both parties will avoid the problems of further liabilities being built up in the Fund by an employer struggling with affordability.
Myth 2 busted: inflexible LGPS?
The LGPS Regulations only anticipate the binary positions of an employer being active or being ceased: this is probably what gives rise to the comments about “inflexibility”. However, there is nothing in the Regulations which prevents a managed exit (provided this is on agreed terms between the employer and Fund). We have worked with many Funds to make this work in practice, including legal adviser approval: it’s perfectly feasible to find such an exit door.
We are aware that, like the three year “grace period” option for employers that may temporarily have no active members, this is something where different Funds may take different views, and which might vary between employers. Whilst an employer should not assume that its Fund will agree to any given proposal, it’s worth bearing in mind that better outcomes for both parties are more likely if:
- there is communication, as early as possible, from the employer to the Fund as regards its intentions;
- the employer is open with the Fund before implementing policies which stem the flow of new entrants, or finding artificial means to restrict their LGPS membership: such policies run the risk of storing up issues for a later date when the range of solutions may be more limited;
- the Fund is clear about the amount and form of acceptable security provision, and how this is linked to the options made available. Generally speaking, the greater the security, the more flexible the Fund can afford to be;
- the employer produces a business case, backed up by financial statements and projections, explaining why it is unable to afford large cessation payments and suggesting alternative repayments, and outlining what security it is able to offer;
- consideration of the employer’s investment strategy is built in to help target the end point.
Despite what some commentators may say, this is not a zero-sum game: exit from the LGPS can be managed in a “win-win” fashion, where both parties work together.