What do I need to know?
Important information LGPS
The Local Government Pension Scheme (LGPS) Regulations allow Pension Scheme Administering Authorities to admit an external provider of services into their LGPS Fund as a Transferee Admitted Body (TAB) employer.
The provisions were introduced to allow specified groups of employees (designated in the transfer order) to have continued access to the Local Government Pension Scheme (LGPS) following a TUPE transfer to a private sector organisation. They are incorporated in schedule 2 part 3 (1d) of the LGPS regulations 2013. Schedule 2 part 3 (5 – 13) of those regulations covers the Admission Agreement requirements between a TAB and the Administering Authority.
TABs are predominantly profit-making private sector contractors dealing with functions which have been outsourced from local government employers under the government’s best value arrangements. For local authority contracts the Best Value Authorities Staff Transfers (Pensions) Direction 2007 made under section 101 of the Local Government Act 2003, applies and came into force on 1 October 2007.
Guidance on admitted body status provisions in the LGPS, issued by Communities and Local Government (CLG) in December 2009, makes it clear that pensions issues should not be seen in isolation from any tendering and procurement exercise. Early and full consideration should remove any complications, uncertainty or unnecessary delays to the transfer. This should be done at the earliest possible opportunity and before the procurement process begins in earnest, and especially when first drawing up a tender specification.
Cheshire Pension Fund has been made aware of some cases where employers have let contracts to organisations and either not let the Fund know or, if they have, it has been left too late on in the process and led to delays and complications.
While occupational pension arrangements are not covered by TUPE regulations, there must still be appropriate arrangements to protect occupational pensions, redundancy and severance terms of all staff transferring. Pension protection is prescribed in the Best Value Authorities Staff Transfers (Pensions) Direction 2007 www.communities.gov.uk/publications/localgovernment/authorities-staff-transfers order and must be secured for each TUPE transferred employee. It must be the same, broadly comparable or better than those rights they had prior to the transfer.
The following guidance will help you to obtain a full appreciation of these obligations and any associated risks before entering into a local government contract.
Important information from Cheshire Pension Fund
Employers seeking admitted body status will find the links below helpful in providing information on the pension implications of becoming an employer within the Cheshire Pension Fund.
Data for the Fund Actuary – the letting authority must provide details of the eligible LGPS staff transferring. Cheshire
Pension Fund will issue employers with a data capture spreadsheet at the outset of the process and this must be
completed in full and returned to the Fund before the actuary can be engaged.
Indemnity Bond – the regulations also require that the letting authority carry out an assessment of the level of risk to
the Fund on the premature termination of the agreement. The level of the bond can also cover the redundancy costs on
premature termination and the risk of a deficit on termination. The risk assessment needs to be carried out to the
satisfaction of the administering authority and the assessment is typically undertaken by the scheme actuary and is part
of the overall Admitted Body Status package.
Employer rate – from the returned data, Cheshire Pension Fund will provide the actuary with membership data who will
calculate a suitable employer contribution rate. This will depend, in particular, on the age profile and service history of
the transferring employees. An ageing workforce with average service history of say 20-30 years would imply a higher
rate than one with younger members with shorter service. The approach to funding liabilities during the course of the
contract will be clear to potential bidders.
The pension fund is subject to an Actuarial valuation every three years. The fund’s liabilities and assets are re-assessed at this time and the employer contribution rates set for the following three years.
Valuation date implementation date for revised contribution rates are:
As a standalone employer in the pension fund you have responsibilities as laid out in the scheme regulations. Adherence to these responsibilities will enable Cheshire Pension Fund to effectively administer the pension scheme. They are:
- Determine membership eligibility and provide the pension fund with the relevant notification.
- Determine employees’ contribution rates in accordance with the regulations; make the deductions and payment of the contributions to the pension fund within the time periods set out in the Occupational Pension Schemes (Scheme Administration) Regulations 1996.
- Inform the pension fund of changes to member’s circumstances.
- Inform the pension fund of leavers from the pension fund and provide the relevant information.
- Provide the pension fund with year-end information.
- Provide details of any changes to the organisation that may impact funding matters including the outsourcing of services.
- Publish a policy on any employer discretions required by the LGPS regulations.
- Appoint a specified person to hear 1st stage Internal Dispute Resolution Procedure (IDRP) appeals. More details on the administrative process can be found in the New Employer Guide along with a suite of forms for completion.
There will be an actuarial cost for setting up a new admitted body in the Fund and calculating an opening balance sheet position. Actuarial fees will also be incurred if you require an actuarial report (FRS17) for the inclusion of pension costs in your accounts. Please contact the Fund for current charges.
Contribution payments for both employee and employers are due at the relevant rate by the 19th of the month following deduction. If there is a late payment interest may be charged in line with the pension scheme regulations.
Other Pension Costs
It is important to understand what pension costs the admitted body will be responsible for meeting as an employer in the pension fund. Some of the costs will be direct and others indirect.
Pension Strain Costs
Pension strain costs occur when a member draws their benefits earlier that their state pension age. The costs are based on the individual members profile and circumstance at the point of receiving their benefits. It is suggested you contact the pension fund for an estimate prior to agreeing the release of a pension early. These charges will be invoiced directly.
Increase a members’ pension
If an admitted body uses their discretion to increase a member’s pension, the cost will need to be met by the admitted body and will be invoiced directly.
Waiving an actuarial reduction
If an admitted body uses their discretion to waive a reduction on a member’s pension, the cost will need to be met by the admitted body and will be invoiced directly.
Ill Health Retirement costs
Ill health retirement can have a significant financial impact on an employer as benefits are paid early with potentially large enhancements of service. The cost of this is either, identified at the triennial valuation of the Fund and recharged back to the academy via the contribution rate or, similar to the early retirement strain cost above, required to be paid as a one-off payment.
To mitigate against ill health retirement risk, an ill health liability insurance (through Legal and General) is available to employers within the Cheshire Pension Fund. This is cost neutral for an employer as the fund’s actuary has agreed that any premium paid for the insurance can be offset by a reduction in the contribution rate of an equivalent amount.
Roles & Responsibilities
It is vital that all parties involved in an outsourcing process are aware of their role in the process; here is a summary of the main areas for each party.
Administering Authority – Cheshire Pension Fund
- Admit a body (contractor) to the LGPS ensuring compliance. If the letting authority and the contractor agree to meet all regulatory requirements the admission cannot be declined.
- Do not agree bulk transfer or broadly comparable terms unless transferring member’s pension rights are at least equivalent.
- Decide the terms of the Admission Agreement.
- Manage the risk of admission by having regard to the need for an indemnity or bond.
- Review contribution rates during contract, ensuring all liabilities can be met and no surplus or deficit will occur at termination.
- Encourage effective and early communication from letting authorities and employers at all stages.
- Consider pension issues early, including at initial service review, procurement and especially the tender process.
- Meet with the administering authority early, especially if potential contractors wish to offer the LGPS.
- Discuss with staff and trade unions early.
- Assess any potential financial risk to contract, liaise closely with administering authority.
- Be satisfied that a contractor’s existing pension scheme is broadly comparable to the LGPS if this is the preferred route and discuss any bulk transfer terms with the administering authority.
- Establish pension requirements from letting authority as soon as possible.
- Assess potential costs for duration of contract – obtain actuarial advice.
- Establish whether the requirements of broad comparability are met if necessary.
- Review pension payments and be aware of funding position if admission agreement option is taken.