ADMISSION GUIDE FOR NEW EMPLOYERS: TRANSFEREE ADMISSION BODY. London Pensions Fund Authority (LPFA) Local Government Pension Scheme

Transcription

1 ADMISSION GUIDE FOR NEW EMPLOYERS: TRANSFEREE ADMISSION BODY London Pensions Fund Authority (LPFA) Local Government Pension Scheme 1

2 Contents Introduction Background to the Local Government Pension Scheme Characteristics of a Transferee Admission Body Admission Process for Transferee Admission Bodies Ongoing management Termination Key Contacts Appendices 2

3 Introduction This admission guide provides an overview about admission arrangements for organisations seeking participation in the LPFA Pension Fund (the Pension Fund ) and provides information about the ongoing management responsibilities of organisations that participate in the Pension Fund. An organisation may only participate in the Local Government Pension Scheme (the scheme ) by virtue of the Local Government Pension Scheme (Administration) Regulations 2008 (as amended). All interested parties should seek their own legal advice to ensure they are clear about their responsibilities and the potential liabilities of participating in the Scheme. Outsourcing employers should seek appropriate legal advice to ensure that they complying with all legislation relating to the outsourcing arrangement. The Pension Fund will aim to facilitate the admission of new organisations to the Scheme to enable the efficient and effective of services. However, the Pension Fund has a duty to establish that appropriate funding will be available to pay benefits now and in the future and that the costs of benefits for employees transferring to a contractor is managed in such a way that they do not adversely affect other employers in the Pension Fund. 3

4 Background to the Local Government Pension Scheme Legal Framework The Scheme is a statutory scheme, established by Act of Parliament. The terms of the Scheme are contained in three sets of regulations: Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 (as amended) Local Government Pension Scheme (Administration) Regulations 2008 (as amended) Local Government Pension Scheme (Transitional Provisions) Regulations 2008 (as amended) These regulations apply to employees of local authorities other than teachers, fire fighters and police officers. Other specified bodies providing public services are included by statute or may apply for admission. Contributions Employee Contribution rates in the LGPS are tiered between 5.5% and 7.5% and employees will pay the contributions at the appropriate rate depending on their whole time equivalent pensionable salary. The contribution bandings are amended annually. Employer Contribution rates are set at each triennial valuation, but can be recalculated by the actuary at the discretion of the employing authority if it is felt that there has been a material change to the membership of any employer. Benefits The Scheme is a defined benefit final salary scheme which guarantees to provide benefits which are a specified fraction of a scheme members final pay. The Scheme is contracted out of the State Earnings Related Pension Scheme. The main provisions of the Scheme as defined in the Local Government Pension Scheme (Benefits, Membership and Contributions) regulations 2007 (as amended) are shown below. Further details can also be found in the scheme booklet, available from the Pension Fund s website ( or on the scheme website ( 4

5 Age of retirement: The normal retirement date for scheme members is 65. The Scheme also makes provisions for the early payment of benefits from age 55 in certain circumstances. Retirement benefits: For membership after 1 April 2008, annual pension based by final pensionable pay multiplied by 1/60 th for each year of scheme membership. For membership accrued to 31 March 2008, annual pension based on final pensionable pay multiplied by 1/80 th for each year of scheme membership plus a lump sum of three time annual pension. Ill health: Three tier ill health retirement provision. Death in service: Lump sum death grant of three years final pensionable pay. Protection for the family: Pensions payable to surviving spouses, civil partners, nominated cohabiting partners and dependent children based on the former employee s membership and final pay or pension. Governance and administrative arrangements for the LPFA Pension Fund The LGPS Scheme is a national scheme, run locally by Administering Authorities in accordance with the LGPS regulations. The LPFA was established as a Public Body on 31 st October 1989 by The Local Government Reorganisation (Pensions etc.) Order 1989 [SI 1815]. This Order transferred to the Authority with effect from 1 st April 1990 all the functions, property, rights and liabilities of the London Residuary Body (LRB) in relation to the GLC Superannuation Fund, and the role of Administering Authority for the Fund within the Local Government Pension Scheme. The Order is the primary instrument for the LPFA s powers and duties, which in the context of the Fund administration are very similar to those of local government authorities. Appointments to the Board, and thereby the assignment of voting rights, are the responsibility of the Mayor in accordance with the provisions of SI No which require there to be between seven and eleven members, of which one half, excluding the chairman, are to be appointed following consultation with representatives of local government in London. The LPFA Board operates under a framework of corporate governance and undertakes its responsibilities with reference to Standing Orders, which are similar to those found in all local authorities and prescribe all activities 5

6 relating to the conduct of Board business. These Standing Orders are incorporated into the Authority s Constitutional document and represent the fundamental underpin of corporate governance; they may only be amended by formal approval of the Board. LPFA has three main Committees which regulate operational and strategic issues Investment Committee, Performance and Administration Committee and Audit Committee. LGPS (Management and Investment of Funds) Act 1998 as amended by the 2009 Regulations sets out the framework within which LPFA can operate and limitations on the type of certain asset classes (available on request). Duties include the preparation of Statement of Investment Principles, Funding Strategy Statement and as a form of best practice the Authority should seek independent investment advice. The investments are generally managed by external Investment Managers, who have substantial discretionary powers regarding their individual portfolios. Administration of scheme members membership and the payment of benefits is carried out by the LPFA s internal teams. Service standards are set annually and reported quarterly to Performance and Administration Committee. Further information about the governance and administrative arrangements of the Pension Fund can be found in the Pension Fund Annual Report and Accounts, Governance Policy and Compliance Statement and Administration Strategy which are available on the website 6

7 Characteristics of a Transferee Admission Body Organisations can only participate in the LPFA Pension Fund if they meet the requirements of the Local Government Pensions Scheme (Administration) Regulations 2008 (as amended). There are four main types of employers who can join the Pension Fund; Scheduled Bodies, Designated Bodies, Community Admission Bodies and Transferee Admission Bodies. A Transferee Admission Body is defined in full under Regulation 6 of the Local Government Pensions Scheme (Administration) Regulations 2008 (as amended). They are usually formed when a service or function offered by a local authority or other scheduled body is contracted out to the private sector. These bodies gain entry into the Pension Fund by entering into an admission agreement with the Administering Authority. Applications from transferee admission bodies are considered on a case by case basis and admitted to the Pension Fund at the discretion of the Administering Authority. In some circumstances this may require approval by the Secretary of State for Communities and Local Government. The key characteristics of a transferee admitted body are summarised below: Method of Participation Admission Agreement Indemnity Requirements Guarantor, bond or indemnity Ongoing Participation Participation for fixed term, linked to duration of service contract. Entry to LGPS Employer discretion on who can become a member 7

8 Admission Process for Transferee Admission Bodies Key Questions Does your organisation qualify as a Transferee Admission Body under Regulation 6 of the Local Government Pensions Scheme (Administration) Regulations 2008? Does the contractor want to come into the LGPS or will they offer employees a broadly comparable scheme? Will the admission agreement be open, nominated or closed? How will risk be shared between the contractor and outsourcing employer? Will the contractor be required to have a bond or will the outsourcing employer act as guarantor? Will any pass through arrangements be agreed? What will be the impact of the outsourcing on the outsourcing employer s payroll and contribution rate? Will the admission agreements be in place by the contract start date? 8

9 Legal issues Organisations thinking of outsourcing a service must take their own legal advice on whether or not they are under an obligation to ensure pension protection for their staff TUPE transferring to a new employer. Protecting the pensions of public sector staff transferring to outsourced service providers is fundamental and should be included as an integral part of the overall contract discussions and considerations. It is vitally important that officers who have responsibility for, or have involvement in, best value procurement or other forms of outsourcing discuss the pension implications of outsourcing staff with the administering authority at an early stage of the tendering process. The outsourcing scheme employer is responsible for informing the Pension Fund of any transfer of staff due to outsourcings so that membership records can be accurately maintained and the necessary arrangements can be made for admission to the Pension Fund in advance of the transfer of staff to the new employer. This is to ensure that members pension benefits are fully protected, that the scheme employer and the contractor are aware of the impact of the outsourcing on their Pension Fund liabilities and the Pension Fund as a whole is adequately protected. Pension options Pension protection can be achieved by enabling transferring employees to either: Remain members of the Scheme by the contractor obtaining admitted body status in the Pension Fund for the duration of its contract with the outsourcing employer; or Joining a pension scheme that is broadly comparable to the Scheme. Broad comparability must be certified by the Government Actuary s Department (GAD). This does not require the contractors pension scheme to be identical to the Scheme but it does mean that taking all of the differences between the schemes into account, the effect should be that no identified individual or group of individuals in the transferred workforce should suffer material detriment overall in terms of their future accrual of pension benefits under the new employers scheme. 9

10 It is the responsibly of the outsourcing employer to ensure that their contractor demonstrates that the pension scheme it is proposing to offer to transferring employees has been certified by GAD as broadly comparable to the LGPS. Further information on obtaining certification can be found on the GAD website ( Process for gaining admitted body status An outline of the process for an organisation to obtain admitted body status in the LPFA Pension Fund is set out below. Explanatory notes can be found in the sections that follow. A prospective tenderer will not be in a position to make an informed bid to provide a service unless the costs of participating in the LGPS are included as part of the tender documents. An outsourcing scheme employer should therefore obtain an indicative employer contribution rate from the Pension Fund to include in the tender documentation before commencing a procurement exercise. The Pension Fund should be contacted at least 8 weeks prior to contract notice to allow sufficient time for the necessary calculations to be carried out. Tender Stage Outsourcing employer notifies the Fund of outsourcing at tender stage The Fund requests employee information from outsourcing employer in specified format. Actuary undertakes actuarial valuation of liabilities to determine employer contribution rate and risk assessment if applicable The Fund passes this information to the outsourcing employer for inclusion in the tender specification Outsourcing employer determines contractual arrangements for pension liabilities and need for a bond. 10

11 Contract Stage Under the Local Government Pension Scheme regulations, admission agreements are required to be in place by the start of the service contract. The timescales for finalisation and sealing of the admission agreement will depend on whether an updated valuation is required and amount of negotiation over the terms of the admission agreement. Costs associated with this will be recharged to the parties involved in the admission agreement. Outsourcing employer notifies the Fund of award of contract including name of successful bidder, contract details and details of (final) transferring employees. Information to be provided in specified format. If necessary, Actuary undertakes updated actuarial valuation of liabilities to determine employer contribution rate and risk assessment. Information passed to the Fund s legal representatives to issue draft admission agreement and letter of guarantee or bond (as applicable) to contractor and outsourcing employer. ` Admission agreement and letter of guarantee or bond (as applicable) agreed, signed and sealed by all parties. These documents should be signed in advance of the commencement of the service contract and effective date of admission agreement. Contractor set up as a new employer in the Fund. Contractor informed about arrangements for paying contributions to the Fund and starter information required from employees/employer (to be returned within 1 month of effective date of agreement). See Appendix E: Employee starter form and Appendix F: Employer starter spreadsheet. 11

12 Admission agreement To gain admitted body status, an organisation must enter into an admission agreement. An admission agreement is a tripartite agreement between the contractor, outsourcing employing body and the administering authority (LPFA). The contents of an admission agreement are prescribed by Schedule 3 of the Local Government Pension Scheme (Administration) Regulations 2008 (as amended). The key provisions are: The relevant service contract to which the admission agreement relates. Eligibility for membership. The employers liability to pay employer contributions including normal ongoing contributions and how and when they will be varied, additional contributions to meet certain strains on the Pension Fund e.g. early retirement and termination liabilities. Requirements to put in place and review any bond or indemnity. The employers obligations including the preparation and maintenance of discretionary policy statements. Termination provisions. Open or closed scheme Admission agreements may be open, nominated or closed. An open agreement potentially allows any employee of the contractor involved in the provision of the outsourced services to become a member of the Scheme i.e. new recruits the contractor employs in the provision of the outsourced service. A nominated agreement allows a specified group of employees, named in the admission agreement, eligibility to become a member of the Scheme at any time. A closed agreement relates only to a fixed group of employees. Only those employees who transferred to the contractor from the outsourcing employer can remain or be members of the Scheme. This would include staff not currently in the Scheme at the contract start date but who would retain the right to join the Scheme once they are transferred. 12

13 Indemnity arrangements The Pension Fund has a duty to ensure that the costs of benefits for employees transferring to a contractor are managed in such a way that they do not adversely affect other scheme employers in the Pension Fund. The Local Government Pension Scheme (Administration) Regulations 2008 (as amended) requires an assessment to be carried out, taking into account actuarial advice, of the level of risk arising on premature termination of the provision of the service or assets by reason of insolvency, winding up or liquidation of a transferee admission body. Where the level of risk identified by the assessment is such as to require it, the transferee admission body is required to enter into an indemnity or bond to meet the level of risk identified. In recognition of the risk surrounding transferee admission bodies, the Pension Fund requires a bond or guarantor (usually the ceding employer) from all transferee admission bodies as a condition of their participation in the Pension Fund. The Pension Fund will carry out a risk assessment and advise the outsourcing employer and transferee admission body where relevant of a potential bond amount. The outsourcing employer and transferee admission body should then determine the most appropriate bond level depending on how the different types of risk associated with participating in the Pension Fund are to be shared between the organisations. Outsourcing employers should note that under regulation 38 (c) of the Local Government Pension Scheme (Administration) Regulations 2008, any shortfall attributable to a transferee admission body will ultimately fall to the outsourcing employer if the Pension Fund is unable to obtain contributions from the transferee admission body, along with any deferred or pensioner members of the transferee admission body on termination of the admission agreement. The assessment of a bond or indemnity takes into account the following factors: The risk that the transferee admission body goes into liquidation, insolvency or winds up during the period of the contract; The likelihood that the transferring employees are made redundant as a consequence; The funding strain arising from the early payment of liabilities that will arise as a result of redundancy. The Local Government Pension Scheme (Benefits, Membership & Contributions) Regulations 2007 (as amended) states that when a member who is aged 55 or over is 13

14 made redundant, the member is entitled to the immediate unreduced payment of their pension benefits; Any discretionary awards that would be made under regulation 12 and /or 13 of the Local Government Pension Scheme (Benefits, Membership and Contributions) regulations (as amended); Any general funding shortfall, arising from variations between experience and assumptions used when determining the ongoing employer s contribution rate. There are a number of types of risks for the sponsor of a final salary defined pension scheme, including: Financial, for example the risk that the Pension Fund assets fail to deliver investment returns in line with the anticipated returns underpinning the valuation of liabilities or returns on Government bonds fall, leading to an increase in the value placed on liabilities. Demographic, for example, the risk of pensioners living longer than expected or more early retirements on ill health grounds than expected. Regulatory, for example, the risk of changes to regulations which increase the cost of the scheme. Section 6 of the Local Government Pension Scheme (Administration) Regulations 2008 lays out certain conditions on the type of financial institution that bonds can be with (see The transferee admission body must provide the Pension Fund with details of their proposed bondsman for approval in advance of a bond being entered into. The Pension Fund and outsourcing employer are required to keep the level of risk relating to an admission agreement under review and therefore may require the transferee admission body to put in place a revised bond or indemnity if appropriate. Where a bond is required, the contractor is responsible for the costs associated with accessing and maintaining a bond. Outsourcing employers should note that protection for the Pension Fund is enhanced by provisions in the Scheme regulations whereby ultimately any shortfall attributable to a transferee admission body would fall to the outsourcing scheme employer in the event of a contractor being unable to meet its funding commitments to the Pension Fund. This includes 14

15 responsibility for any deferred and pensioners members of the contractor after the termination date of the contract. Funding treatment On commencement of an employer s participation in the Pension Fund, the employer will accept ongoing financial responsibility to provide for the future pension benefits in respect of those employees whose employments transfer from a previous employer and for any new employees who join the Pension Fund. Financial responsibility includes: The pension benefits accruing for service after the date of commencement for the initial employees; The accrued pension benefits from past service for those initial employees whose pensionable service is continuous before and after the transfer. This includes any deficit arising after the commencement date in respect of transferred accrued service prior to the commencement date; The pension benefits accruing for future service for new employees; and Other pension benefits for the employees e.g due to transfers in to the Pension Fund. The Local Government Pension Scheme (Administration) regulations 2008 (as amended) allow an employee becoming an active member of the Scheme to transfer previous pension rights into the Scheme. The pension benefits for deferred and pensioner members until the member and any eligible dependents die (widows, widowers, children, cohabiting partners or civil partners). New scheme employers in the Pension Fund will usually start 100% funded which means that assets equal to the value of the liabilities on the date of transfer are notionally transferred from the ceding employer to the transferee admission body. It should be noted that this does not mean the scheme employer commences participation in the Pension Fund with zero liabilities. The scheme employer s initial contribution rate will be set to cover the expected cost of pension benefits earned during the period of the contract. This will be reassessed during the life of the contract at each triennial valuation of the Pension Fund with any surplus or deficit spread over a period as set out in the Pension Fund s Funding Strategy 15

16 Statement. Further information is provided in the Ongoing Management section. A share of Fund or other basis could be adopted subject to agreement between the parties to the admission agreement. Employer contribution rates would be set accordingly. Impact on the Awarding Authority The transfer of staff from the outsourcing employer to the transferee admission body could affect the future service contribution and deficit repayment contributions payable by the outsourcing employer: Future service contribution: The future service rate could change if the membership profile (e.g age, gender, full time/part time) changes significantly as a result of the transfer of staff. Deficit repayment contributions: If the transferee admission body is set up fully funded on commencement, any deficit attributable to the transferring members is assumed to remain with the outsourcing employer. In this situation, the deficit repayment contributions of the scheme employer, as a percentage of payroll, will increase as the total amount of deficit attributable to the scheme employer is unchanged but its payroll would have reduced as a consequence of the transfer. The impact of a staff transfer on the outsourcing scheme employer s contribution rate can be assessed by an actuarial valuation if required, particularly if the payroll in respect of the transferring staff is material relative to the payroll of the scheme employer. The Pension Fund should be instructed to carry out this work at the time the initial contribution rate for the new employer is calculated. Pass through arrangements Exposure to the risks and liabilities of a final salary pension scheme such as the Scheme may not be acceptable to certain contractors. Contractors and outsourcing scheme employers may therefore reach an agreement whereby the pension costs payable by a contractor under the terms of the admission agreement are shared between the contractor and the outsourcing employer. Such agreements are referred to as pass through arrangements and could include: 16

17 Fixed contributions: If a contractor is required to pay employer contributions higher than x % of pensionable pay or x, the outsourcing employer will reimburse the contractor for the excess. Cap and collar: The outsourcing scheme employer and contractor agree an upper and lower level of employer contributions. If the employer rate certified by the actuary is within the agreed range the contractor will pay this rate. If the contributions are outside of this range, the service fee payable by the outsourcing scheme employer to the contractor is adjusted accordingly. Termination liabilities: The outsourcing scheme employer and contractor agree to share the cost of any termination liability. These arrangements are the result of a contractual agreement between the contractor and outsourcing scheme employer. From the Pension Fund s point of view, the contractor s liabilities under the admission agreement are unaltered by any such pass through arrangements and the Pension Fund will therefore not be involved in the agreement of these arrangements. The details of any pass through arrangements should be clearly documented in the service contract and not in the admission agreement to the Pension Fund. Both parties should obtain appropriate legal advice before entering into any such arrangements. 17

18 Ongoing Management This section of the guide provides information about the ongoing management responsibilities of organisations that participate in the Pension Fund. Administration The efficient delivery of the benefits of the Scheme is dependent on sound administrative procedures being in place between the Administering Authority and Scheme Employers. The LPFA has developed an Administration Strategy which is available on our website: This strategy outlines the responsibilities of all scheme employers in the Pension Fund and the performance standards scheme employers are expected to meet to enable the LPFA to deliver an efficient, quality and value for money service for its members and other stakeholders. The Administration Strategy sets out the ongoing responsibilities for both the administering authority and scheme employers whilst they are participating in the Pension Fund. This document includes: Responding to year end queries The completion of starter, changes during employment and leaver forms via our secure online facility Payment of employee and employer contributions to the Pension Fund and provision of schedule of payment within 19 days of deduction from salary All information must be provided in the format prescribed by the LPFA within the prescribed timescales. Information and guidance is provided in the Employers Guide which is accessible, along from the LPFA s website. Employers are also required to provide end of year returns to the LPFA annually by 30 th April, detailing the contributions paid by the employer and their members during the previous tax year, and in accordance with the specifications provided by the Pension Fund. Employers are also required to complete an annual declaration form and provide copies of their annual accounts when requested. 18

19 Scheme employers should be aware that the scheme regulations provide pension funds with the ability to recover from a scheme employer any additional costs associated with the administration of the Scheme incurred as a result of the poor performance of that scheme employer. The Administration Strategy sets out the LPFA s policy and charging scales for charging scheme employers for poor performance. Communication The Pension Fund has published a Communication Strategy Statement, which describes the way the Pension Fund communicates with scheme members, scheme employers and other stakeholders. The latest version is accessible from the Fund s website. At the time new scheme employers are admitted to the Pension Fund, employers will ask that they complete a contact form identifying the key contacts at the scheme employer for pension fund matters. It is essential that the Pension Fund is informed when there are any changes in these key contacts so that the Pension Fund can ensure information is distributed to all scheme employers in a timely manner. Discretions policy The majority of benefits paid from the Scheme are prescribed by regulation. However, the Scheme also contains several discretionary provisions that apply to scheme employers in the Pension Fund. Scheme employers are required to formulate and publish policies regarding the exercise of these discretions and subsequently keep them under review. A copy of the policy must be sent to the Pension Fund within 30 working days of the policy being agreed by a scheme employer. The main discretionary provisions for employers in the Pension Fund are set out in the table on the following pages. 19

20 Area Regulation Discretion Election for early payment of benefits Flexible retirement Transfer rights Contributions during absences Regulation 30 (2) LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 30 (5) LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 18 (1) LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 18 (3) LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 83 LGPS (Administration) Regulations 2008 Regulation 22 LGPS (Administration) Regulations 2008 Whether to grant an application for early payment of accrued benefits on or after age 55 and before age 60. Whether to waive, on compassionate grounds, the actuarial reduction applied to benefits paid early. Nb the cost of waiving the reduction would have to be met by the employer. Whether to allow an employee who is aged 55 or more to receive their accrued benefits immediately when they reduce their hours or grade. Whether to waive, in whole or in part, actuarial reduction on benefits paid on flexible retirement. Whether to extend the normal time limit for acceptance of a transfer value beyond 12 months from joining the LGPS. Whether to allow an application more than 30 days after a member returns to work or ceases employment to pay optional contributions for a period of unpaid absence. Augmentation Regulation 12 LGPS (Benefits, Membership & Contributions) Regulations 2007 Whether to increase an active members benefits by the addition of up to 10 years service. Nb the employer must meet the cost of providing additional benefits. 20

21 Additional membership Shared cost AVC scheme Forfeiture of pension rights Aggregation of membership Contributions payable by active members Application for reinstatement of suspended tier 3 Ill Health pension Regulation 13 LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 15 LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 47 LGPS (Administration) Regulations 2008 Regulation 16 LGPS (Administration) Regulations 2008 Regulation 3 LGPS (Benefits, Membership & Contributions) Regulations 2007 Regulation 30A (3) of the LGPS (Benefits, Membership and Contributions) Regulations 2007) Whether to grant additional pension to a member by up to 5000 pa. Whether, how much and in what circumstances to contribution to a shared cost AVC scheme. Whether a member s pension rights should be forfeited and paid to the employer if the member is convicted of an offence committed in connection with their employment and because of which they have left that employment or has left employment in consequence of a criminal, negligent or fraudulent act. Whether to extend the 12 month option period for aggregation of deferred benefits for deferred beneficiaries re-joining the scheme. Whether to reallocate members into the appropriate band for contributions on changes of employment conditions during the year. Whether to grant an application for re-instatement of a suspended tier 3 ill health pension on or after age 55 and before age 60 21

22 Waiver of actuarial reduction on compassionat e grounds Regulation 30A of the LGPS (Benefits, Membership and Contributions) Regulations 2007) Determine whether to waive on compassionate grounds any actuarial reduction that would otherwise be applied to benefits paid early In addition to the above, certain discretions under the Scheme vest with LPFA, in its capacity as Administering Authority of the Pension Fund. These apply to all members of the Pension Fund and are listed in Appendix A. Employer contributions/triennial Valuation The contributions payable by scheme employers are assessed as at the commencement date of the admission agreement (or designation for designated bodies) and re-assessed at each triennial valuation of the Pension Fund, in accordance with the Local Government Pension Scheme (Administration) Regulations 2008 (as amended). Scheme employers should ensure they understand the potential volatility of employer contribution rates. Employer contributions are normally made up of two elements; the estimated cost of future benefits being accrued ( future service rate ) and an adjustment for the funding position of the scheme employer at the valuation date ( past service adjustment ). The actuary adopts a funding method which separately values these elements, adopting assumptions that are formally set by the Actuary in consultation with the Administering Authority. Future service rate: To determine the employer contribution requirement for future service for employers who continue to admit new members, the Actuary assesses the cost of future service benefits for the year following the valuation date, taking into account expected future salary increases (the projected unit method ). The contribution rate required to meet the cost of future service benefits is derived by taking this value less the contributions expected from member s. This is the future service rate and is expressed as a percentage of pensionable payroll. The aim is to ensure sufficient assets build up to meet future benefits payments in respect of future service. 22

23 Past service adjustment: The funding position of each scheme employer at the valuation date is calculated by comparing the notional value of the scheme employer s assets with the value of past service benefits, taking into account expected future salary increases. Where the funding level is greater than 100% an employer is in surplus. Where the funding level is less than 100% an employer is in deficit. The funding target of the Pension Fund is to achieve a funding level of 100% over a specific period and therefore an adjustment will be made to an employer s contribution rate (past service adjustment) to target a 100% funding position over that period. This past service adjustment is usually expressed as a monetary amount payable per annum. The length of deficit recovery periods or surplus spreading period will depend on the type of scheme employer. Further information can be found in the Fund s Funding Strategy Statement, available on the Pension Fund s website ( The contribution rate payable by a scheme employer will therefore reflect the individual experience of the employer during the valuation period and at the valuation date, including the contributions paid relative to the cost of benefits accruing, the liability profile of the employer (i.e mix of members by age, gender, part time/full time), effect of salary increases awarded by the employer and early retirement experience (ill health and non ill health). In certain circumstances, the Fund allows smaller employers of similar types, e.g. leisure centres and charities, to pool their contributions as a way of sharing experience and smoothing out the effects of costly but relatively rare events such as ill health retirements or deaths in service. Whilst contributions are pooled, the Actuary will still track the funding position for each employer separately at each triennial valuation. The Administering authority does not account for each scheme employer s share of the Fund s assets separately. The Actuary apportions the assets of the whole fund between scheme employers using the income and expenditure figures provided for certain cash flows for each employer. This split is calculated using an actuarial technique known as analysis of surplus. Any surpluses or deficiencies arising from investment experience will effectively be allocated on a pro rate basis. The contribution rate payable by employers will be set out in the rates and adjustments certificate issued by the Pension Fund s actuary. These contributions represent the minimum contribution rate payable by 23

24 employers. The Fund should be contacted if employers would like to pay regular contributions at a higher rate or would like to make a one off capital payment. In addition to the ongoing contributions outlined above, scheme employers are required to make additional payments to the Fund in respect of early retirements or the early payment of benefits on the grounds of efficiency, redundancy, voluntary grounds with employer consent or compassionate grounds, calculated using factors provided by the Fund s Actuary. The Administrating authority also monitors ill health early retirement experience and further employer contributions may be required if the employers ill health experience is worse than expected. Further information on the Fund s strategy for meeting employer s pension liabilities can be found in the Funding Strategy Statement. Information on the latest actuarial valuation of the Pension Fund can also be found on the Pension Fund s website. Closing the scheme to new entrants The standard approach taken by the Actuary in assessing employer contributions, as outlined in the previous section, assumes that an employer has an open scheme and therefore that there is a stable membership profile and age. Employers may want to consider closing the scheme to new entrants, usually for cost saving reasons. However, there are a number of implications of closure that should be taken into account and which could in the short to medium term actually increase costs rather than reduce them: On closure, the average age of a scheme employer s membership is likely to increase over time. The cost of future accrual ( future service rate ) would therefore increase as a percentage of payroll as the membership aged. The Actuary would adopt an attained age method for calculating the future service rate for an employer which would anticipate this aging of membership. As members leave, the pensionable payroll for the scheme employer would reduce. If there is a funding deficit for the scheme employer, this deficit would therefore be paid against a reducing payroll and therefore the past service adjustment (as a percentage of payroll) would therefore increase. The employer may be 24

25 requested to make their past service adjustment as an annual lump sum amount to compensate for this. If there is a funding deficit for the scheme employer then for a closed scheme the past service adjustment will usually be paid over the future working lifetime of the remaining active members. This may well be a shorter period compared with the deficit recovery period that would normally apply to the employer. The additional deficit contributions per annum could increase significantly as a result. Closing the scheme to new entrants starts the clock ticking on the time when the last member will leave. This may bring forward the time the scheme employer s participation in the scheme ceases and a termination payment is payable (for more information on termination payments see the termination section). Any scheme employers considering closing the scheme to new entrants should take all of the cost implications into account. The Fund should be contacted as soon as this is being considered so that the Fund can request the Actuary to calculate the impact on the scheme employer s contribution rate. Investment strategy The Fund s assets are invested in accordance with the Fund s Statement of Investment Principles and overriding legislation. All of the Fund s assets are invested in accordance with a single strategy there is no facility for individual employers to adopt a different investment strategy. 25

26 Termination This section of the guide provides general information about the termination of a scheme employer s admission in the Fund. Notification of termination In many cases, termination of an admission agreement is an event that can be foreseen, either because an organisations operation may be planned to be discontinued or the organisation ceases to be an admission body for the purposes of the scheme regulations. Employers should therefore advise the Fund, in writing, of the ending of its admission agreement at least 6 months prior to the termination date. This includes closed employers where the last active member is leaving, whether due to retirement, death or otherwise leaving employment. Where the reason for departure is insolvency, winding up or liquidation of the scheme employer it is essential that the Fund is contacted as a matter of urgency so that the Fund can take steps to recover any outstanding monies due to the Fund. Having taken actuarial advice, notify the outgoing scheme employer and other relevant parties in writing of the payment required in respect of any deficit on cessation and pursue payment. Cessation Valuation If a scheme employer s participation in the Fund ceases, either because the admission agreement terminates or because an employer elects to withdraw from the scheme, the Local Government Pension Scheme (Administration) Regulations 2008 (as amended) requires the Fund to obtain an actuarial valuation of the liabilities of the employer and a revised rates and adjustments certificate showing the revised contribution rates due. It is the Fund s policy that each scheme employer is responsible for the funding of all Fund benefits of its own members including current and former employees. Whilst in some cases, employer contributions may be pooled in the interests of stability for the purpose of the triennial funding valuation, the individual funding position for each employer is tracked by the Actuary. The purpose of the termination valuation is to assess the 26

27 funding level of the employers section of the Fund on a discontinuance basis i.e to assess the level of contribution required by the scheme employer to extinguish its liabilities in the Fund. The Administering Authority must look to protect the interest of other scheme employers. The Fund s objective will be to minimise the risk that the remaining scheme employers will need to make future contributions to the Fund to cover a deficit arising on the past service liabilities of the current and former employees of the departing scheme employer. The Fund will therefore require the actuary to adopt valuation assumptions which protect the other employers from the likelihood of any material loss emerging in the future as the assumption is that the other employers in the Fund will not underwrite the liabilities of the departing scheme employer in the future. Terminations will therefore usually be based on a minimum risk funding basis unless the admission body has a guarantor within the Fund or a successor body exists to take over the liabilities. This minimum risk basis is a more cautious basis that the assumptions adopted for the triennial valuation to assess the ongoing employer contributions and could therefore give rise to significant payments being required. If there is a shortfall on the termination of the contract, the departing scheme employer is liable to make good the shortfall. The Fund will also pursue any bond or guarantor for payment where appropriate. The shortfall would be levied on the scheme employer as a capital payment. Spreading of any payment will only be permitted in special circumstances and with the agreement of the Administering authority and the actuary. Scheme employers should be aware that there is no mechanism to refund any surplus to the employer so more frequent assessment of funding position towards the end of a contract may be appropriate. Where appropriate, once the Fund has recovered all payments due, the Fund will write to the organisation providing a bond on behalf of the outgoing scheme employer to release the organisation from the obligations in the bond agreement. 27

28 Contacts Any enquires regarding admission to the Scheme should be sent to: Tony Williams Tel: Additional sources of information about the issues discussed in this guide are: Organisation Government Actuaries Department LPFA Pension Fund Local Government Employers (for detail of current regulation) Local Government Pension Scheme Web address

29 Appendix A: Administering Authority Discretions Area Regulation Discretion Fund policy Additional membership requests Regulation 23 LGPS (Administration) Regulations 2008 Whether to require a satisfactory medical before agreeing to an additional regular contribution (ARC) election Applications by members to purchase added years till be subject to the opinion of a registered medical practitioner nominated by LPFA that the applicant is in reasonably good health. Member s contributions Regulation 42 LGPS (Administration) Regulations 2008 The frequency of payment of member s contributions Employee contributions should be deducted from their pay on their regular pay days Cost of calculating AVC conversion to membership Regulation 28 LGPS (Administration) Regulations 2008 Whether to charge a member for the provision of an estimate of additional pension that would be provided by the Scheme in return for a transfer of an in-house AVC/SCAVC fund The cost of calculating AVC conversion to membership will be deducted from the AVC proceeds if the member fails to proceed with the conversion to a service credit. 29

30 Payment of strain costs Regulation 41 LGPS (Administration) Regulations 2008 Whether to require any strain on Fund costs to be paid upfront by employing authority following redundancy, flexible retirement or the waiver of any actuarial reduction. Scheme employers are required to make additional payments to the Fund in respect of early retirements or the early payment of benefits on the grounds of efficiency, redundancy, voluntary grounds with employer consent or compassionate grounds, calculated using factors provided by the Fund s Actuary. Payment of employer contributions Regulation 42 LGPS (Administration) Regulations 2008 The frequency of payments to be made over to the Fund by employers Contributions should be paid on a monthly basis, unless agreed otherwise by the Finance Director. Payments should be made no later that the 19 th day of the month following the month in which the deduction of the employees contributions from pay took place. Payment information Regulation 42 LGPS (Administration) Regulations 2008 Form and frequency of information to accompany payment Each payment to the Fund should be accompanied with a schedule, in the format specified by the Fund. Additional Regulation 43 Whether to The Administration 30

31 costs for poor performance LGPS (Administration) Regulations 2008 issue employers with a notice to recover additional costs incurred as a result of the employers level of performance Strategy sets out the Fund s policy and charging scales for charging scheme employers for poor performance. Interest on overdue contributions Regulation 44 LGPS (Administration) Regulations 2008 Whether to charge interest on payments by employers overdue by more than 1 month Contributions paid more than 1 month after the due date will incur interest from the due date. Capitalisation of extra contributions? Whether to extend the time period for capitalisation of added years contracts The extent of the option period should be 3 months from the date the member s benefits are awarded Abatement of pension Regulation 71 LGPS (Administration) Regulations 2008 Policy on the abatement of pension following reemployment If the rate of pay in the new employment when added to the rate of pension from the former employment exceeds the rate of pay of the former post, then the pension is reduced by the excess Death grants Regulation 23,32 & 35 LGPS (Benefits, Membership & Contributions) Regulations 2007 Decide to whom a death grant is paid Discretion will be exercised in the following manner: 1) If there is a valid nomination 31

32 Child pension Regulation 26 LGPS (Benefits, Membership & Contributions) Regulations 2007 Whether to treat a child as being in continuous education or training despite a break and whether to suspend a child s pension during the break. form, the death grant will be paid to the nominated beneficiaries in the proportions specified. 2) In all other cases, the death grant will be paid to the deceased member s personal representative. However, each case will be reviewed individually and any representations from someone with an interest will be considered. Children s pensions, after the death of a scheme member, are paid as long as they remain in continuous education. A gap of up to 1 academic year should be ignored when assessing the duration of payment of a child s pension. Children s pensions commencing after 6 April 2006 will only be paid up to age 23 in accordance with the Finance Act 32