LGPS employer exits and surpluses: gold at the end of the rainbow!

Unlike other public sector pension schemes it is a funded scheme, and the LGPS is locally administered across the UK by different large funds controlled by administering local authorities. The funding is dependent on the value of investments and employer contributions.

Many employers are exploring the possibility of exiting their participation in the LGPS under their admission agreements because there could be a surplus in scheme funding. The business case for exit is often based on the uncertainties around scheme funding (volatility) and harmonisation of the workforce (other staff participate in money purchase arrangements). These exercises require careful planning as there are real pitfalls for the unwary.

LGPS exit barriers

Legal advice will be required to investigate the barriers to exit. Key areas will be any historic commercial agreements relating to the provision of pensions. Employee contracts will need careful study as well. Another key factor will be whether the LGPS population is unionised. The manner of the planned exit will involve consideration of other LGPS pension benefits, triggered on redundancy and/or terminations based on business efficiency – which can prove very expensive for employers where these rights are triggered.

Employers will need to sit down and carefully plan future pension promises with their financial advisers, and explain everything carefully in an employee consultation if that is the chosen mechanism to make the changes. All foregone LGPS benefits should be explained clearly so informed choices can be made by members.

The surplus potentially payable to the employer on exit may be like a pot of gold at the end of a rainbow – an unachievable dream. Employers will need to tread carefully and take professional advice to give them the best chances of unlocking these funds, where no legal barriers exist.