Doug Mullen and Alice Kinder look at changes to the rules on Local Government Pension Scheme exit credits.
In May 2018, the Government introduced payment of exit credits in the Local Government Pension Scheme (LGPS) where an exiting employer’s share of the pension fund was in surplus. The Government has now introduced new regulations to prevent exit credits which amount to undeserved windfalls.
The Local Government Pension Scheme (Amendment) Regulations 2020 were made on 25 February 2020 and are due to come into force on 20 March 2020. These regulations amend the Local Government Pension Scheme Regulations 2013 and, specifically, the rules around when exit credits are payable.
The rules introduced in May 2018 required LGPS funds to pay an exit credit where an exiting employer’s share of the fund was in surplus – and to do so within three months of leaving. However, this took no account of the risk-sharing arrangements that some contractors have with letting authorities surrounding their participation in the LGPS. Some fortunate contractors were therefore in line to benefit from the risk-sharing arrangements and to receive an exit credit as well.
The amended rules give LGPS funds a discretion to determine the amount of exit credits and specifically confirm that an exit credit may be determined as zero. Before making a determination, the administering authority is required to notify the exiting employer and anyone who has provided a guarantee, as well as the employer or authority who has let the contract (where the exiting employer has been providing a service on behalf of an LGPS employer). The administering authority is required to take the following into account in deciding the amount of the exit credit:
- The amount of any surplus;
- The extent to which the exiting employer contributed to the build-up of that surplus;
- Any representations made by the exiting employer, guarantor or letting authority or by someone who owns, funds or control the exiting employer or, in some cases, the Secretary of State; and
- Any other relevant factors.
These factors make clear that it is not only where risk-sharing arrangements are in place that an exit credit may be reduced or extinguished altogether.
The Government’s consultation response recommends that administering authorities include a policy on exit credits in their funding strategy statement.
The effect of the changes has been backdated to 14 May 2018 (when exit credits were introduced) – unless an exit credit has already been paid, in which case the old rules apply. Making legislation with retrospective effect is very unusual, and we anticipate that there may well be challenges to this change in the rules from exiting employers who have already exited and would have been entitled to an exit credit but for these regulations. We are aware of one court case where a contractor is seeking to recover an unpaid exit credit and a number of other situations where LGPS funds have delayed payment of exit credits that would have been due under the old rules. Given the large sums that can be involved, we anticipate that contractors will not easily let this go.