The LGPS, the Berkshire Pension Fund included, has a large and diverse employer base covering both public and private sector employers. As a result, employers join and leave the scheme every year and the circumstances of employers may change significantly between valuations, affecting both funds and employers.
For some employers, a significant issue can be the cost of exiting the Scheme, which can be prohibitive. Prior to September 2020, the LGPS Regulations 2013 required an exit payment to be made when the last active member of a Fund employer left the Scheme, or an employer otherwise ceased to be an employer in the Fund, and the employer was in deficit at the time of their exit. The introduction of ‘deferred employer status’ into the Regulations allows an administering authority to defer the triggering of an exit payment for a Fund employer where the authority deems this appropriate, where it has had regard to actuarial advice and has set out its policy in its Funding Strategy Statement. ‘Deferred employer status’ means that a ‘deferred employer’ will continue to pay contributions to the Fund as required by the administering authority and as revised from time to time following actuarial valuations as if the employer had not actually left the Fund.
Additionally, a new alternative power of spreading an exit payment allows an administering authority to recover an employer’s exit payment over a period of time. This will be used where the administering authority does not consider that granting deferred employer status is in the interests of the Fund and other employers.
The administering authority and its employers face issues created by changes in the circumstances of employers. The contribution rates of Fund employers are normally assessed and set at Fund valuations, every three years. The administering authority, working with their actuary, will consider a variety of factors in setting an employer’s contribution rate during valuations. However, there may be significant changes between Fund valuations, for example due to a change in covenant strength or workforce composition following a reorganisation. The September 2020 Regulations broaden the circumstances in which the administering authority may amend an employer’s contribution rate between valuations to cover the following situations:
- where it appears likely to the administering authority that the Fund employer’s liabilities have changed significantly since the previous valuation,
- where it appears likely to the administering authority that there has been a significant change in a Fund employer’s ability to meet their statutory obligations (e.g. payment of employer contributions), or
- where a Fund employer has requested a review and undertaken to meet the costs of that review
The introduction of the new powers is intended to help the administering authority manage its liabilities, ensuring that employer contribution rates are set at an appropriate level and that exit payments are managed, with steps taken to mitigate risks, where appropriate. Whilst there is no requirement on the administering authority to use any of the new powers, the administering authority has, in line with the amendments to the LGPS Regulations 2013 as made by the 2020 Regulations, decided to update its Funding Strategy Statement (FSS) in order to adopt ‘new’ employer exit policies. The update to the FSS ensures consistency and transparency.
Statutory guidance on the FSS, produced by CIPFA, requires the administering authority to identify the risks that inevitably arise from managing employers including many private sector providers whose covenants may vary in strength. As set out in the CIPFA guidance, the purpose of the FSS is to document the processes by which the administering authority establishes a clear and transparent fund-specific strategy that will identify how employers’ pension liabilities are best met going forward. The policies as adopted by the administering authority have been guided by this over-arching purpose.
The input of the Fund actuary is important is reviewing and setting the FSS and associated policies. Fund officers have engaged with the actuary and the Pension Fund Committee and Pension Board with an updated FSS and debt arrangement policies now being available.