Local Government Pension Scheme valuation

Results from the latest three-yearly valuation of the Local Government Pension Scheme (LGPS) are starting to trickle through.  With the results used to set contributions for the next three years, finance directors will be hoping that their liabilities and contribution rates are not rocketing upwards.

Whatever the outcome, the Regulator of Social Housing’s 2019 sector-risk profile makes clear that Boards are expected to take a proactive approach to managing the risk of increasing costs. It recommends that Boards seek independent legal advice, where appropriate, to understand their exposure to risk and the impact on their cash-flow arrangements. The sector-risk profile highlights that those running low-margin operations, such as care and support, are seen as particularly at risk.

With around 90 different LGPS funds, each of which will have seen different investment performance over the last three years, housing providers can expect to see differing outcomes from the valuation. The fact that the UK did not exit the EU on 29 March 2019 is likely to have had a positive impact, bearing in mind the valuation date of 31 March 2019. However, the Government’s defeat in the McCloud case is estimated to have added 1% to liabilities in the LGPS, although, in practice, experience will vary from employer to employer depending on the age profile of the workforce.

The valuation results will provide a useful prompt to employers to review whether continued participation in the LGPS is in their best interests. Increasingly, we have seen employers closing to new joiners or exiting the LGPS entirely. The often considerable exit payments that are triggered are a significant disincentive but our experience is that LGPS funds are increasingly willing to consider staging payments over a period of years rather than insisting upon one payment shortly after exit. This approach has been given a boost by a recent government consultation that suggested that the Government is looking at introducing explicit permission for LGPS funds to explore this.

Careful consideration of admission agreements, stock transfer agreements and employment contracts will be required, as will an assessment of the likely reaction of staff to a change. However, for many, exiting has become a question of when, not if.

For more information

For advice on understanding and managing your LGPS risks, please contact Doug Mullen.

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