LGPS Scotland – changes to Regulations – positive but an opportunity missed

David Davison

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On Friday 25th May 2018 new LGPS (Scotland) Regulations 2018 were published and came into effect from 1 June 2018. The Regulations are a result of a long and in depth consultation process focused on trying to assist with the difficulties faced by community admitted bodies (‘CAB’s), mostly charities, participating in these schemes. Charities are often trapped in LGPS unable to afford the contributions to stay in or the cessation debt which would be imposed to exit. The current approach offers CAB’s with only a threatening cliff edge and is inflexible, inconsistent and does not reflect the approach adopted across stand-alone or segmented schemes.

The new Regulations do indeed add some flexibility in a couple of key areas:-

  • The addition of the option for the administering authority (‘AA’) and the employer to agree a ‘suspension notice’ which would defer an employers requirement to pay a cessation debt. The employer would still be required to pay on-going contributions to the Fund as set by the AA. There is not really any specific guidance provided how such an agreement can be reached, which is a bit of a double edged sword. It does not therefore restrict the authority in terms of the approach it can take but as a result leaves the way open for a lot of interpretation. It is to be hoped that AA’s apply this flexibility pragmatically to arrive at reasonable outcomes for both parties.
  • The recognition that if an employer is over-funded then on exit they should have the right to the repayment of that surplus in full. The Regulations have therefore added a definition for an ‘exit credit’ which for the small minority of employers in this position will be welcome news and prevent Funds from just pocketing their surplus on exit.

Unfortunately however even with these changes the revised Regulations are a bit of an opportunity lost. In January 2018 the Pension Committee at ICAS provided a response to the Scottish Public Pension Agency (‘SPPA’) suggesting some additional items which would make these changes more workable and balanced. These recommendations included:-

  • a recognition that CAB’s should be able to make deficit contributions to Funds on a ‘closed on-going’ basis until the last member’s beneficiaries have ceased to receive payments.
  • A consistent basis for the calculation of these payments.
  • That CAB’s funding position be fully and consistently adjusted to recognise and reflect inherited liabilities from prior public sector employments. It is wholly unreasonable that CAB’s are expected to pay for benefits built up for staff who previously worked for public bodies.
  • It should be compulsory for all LGPS funds to provide CAB’s with a note of their estimated cessation value annually to allow both to better manage their funding position.

Scottish Government is to be commended for at least leading the way in trying to find a resolution to the difficult issues faced. A review of 3rd Tier employers in England & Wales is currently underway and it is to be hoped that the findings of this exercise will lead to similar changes to those implemented in Scotland but hopefully even taking a step further. It will be hugely interesting to see how these new Regulations are enacted in practice.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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