By Adam Poulson, FIA, Partner at Barnett Waddingham
This has caused the funding positions in LGPS funds to improve even further.
There are many employers, such as housing associations and charities, who participate in the LGPS for historical reasons. This may have related to the transfer of service, and staff, from a local council along with the need for those staff to remain in the LGPS.
For these employers the number of employed members in the LGPS will decrease over time as employees retire or leave their jobs.
What happens when an employer ceases to have any employees in the LGPS?
This triggers an exit or cessation debt - this debt is calculated as the employer’s share of the asset and the liabilities of the LGPS fund, but on very cautious assumptions. Historically this has resulted in very large exit debt amounts needing to be paid.
The current high interest rates have improved the funding position of many LGPS funds which means exit debts are now at historically low levels.
One of our clients has seen the estimate of its exit debt swing from £10m to £20m and now to virtually nil over the past 3 years.
What can you do now?
Rather than wait for your last LGPS employee to retire or leave, as an employer you can take control and trigger an exit from the LGPS at a time that is right for you – when the exit debt is lower and more affordable.
Steps to exit
You will need to stop providing access to those employees who are still in the LGPS. This means they won’t build up any further benefits in the LGPS if and when you exit.
It requires a consultation process with those employees and the provision of alternative pension arrangement, generally at a lower risk and lower cost.
Should the exit debt be larger than planned there are also a few actions you can consider:
A deferred debt arrangement - the employer remains in the fund without active members and are deemed a deferred employer.
They continue to pay deficit contributions and may exit the fund when they are fully funded on the exit debt basis. Under this arrangement, as the employer remains in the fund, they are still exposed to investment, longevity and inflation risk which could reduce or increase the final exit debt.
A debt spreading arrangement - the exit debt is crystallised at the exit date and the employer agrees a schedule with the administering authority to pay off the deficit over a period of time, similar to a loan repayment.
Reviewing the terms of the admission agreement when first joining the LGPS - it may require another participating employer or the administering authority to cover any exit debt.
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