CESSATION POLICY October 2012 Hertfordshire Pension Fund Local Government Pension Scheme
1 Introduction 1.1 Aims This Cessation Policy for the Hertfordshire Pension Fund (the Pension Fund), which is administered by Hertfordshire County Council, (the Administering Authority) has been prepared by the Administering Authority in collaboration with the Pension Fund s Actuary, Hymans Robertson LLP (the Actuary). The aim of this Policy is to set out: the approach of the Pension Fund for the treatment and valuation of liabilities for employers leaving the Pension Fund; and to outline the responsibilities of ceasing employers, the Administering Authority, the Actuary and, where relevant, the original outsourcing Scheme Employer. 1.2 General Principles The Policy has been prepared on the basis of the following key principles: the Pension Fund s prime objective is to protect the remaining employers in the Pension Fund from any liabilities relating to a departing employer. This is to minimise financial risk where the remaining employers may be required to make future contributions to the Pension Fund for any deficit for past service liabilities of the current and former employees of the departing employer; the Pension Fund will apply the same principles to every employer leaving the Pension Fund, where appropriate; the Pension Fund s preferred approach is to assume a clean break on termination by the full payment of the termination deficit which is calculated by the Actuary on the basis set out in the Funding Strategy Statement. This would extinguish any liability to the Pension Fund by the departing employer; the Pension Fund s key objective is to protect the interests of the Pension Fund which is aligned to protecting the interests of the remaining employers. A secondary objective is to consider the circumstances of the departing employer in determining arrangements for the recovery of the termination deficit. 1.3 Regulatory Framework The Local Government Pension Scheme (Administration) Regulations 2008, as updated by the Local Government Pension Scheme (Miscellaneous) Regulations 2012 ( Scheme ) outlines the general framework for the Administering Authorities of Pension Funds participating in the Scheme. The relevant regulations for employers leaving the Scheme are: Regulation 38(1) states that were an employing authority (other than an admission body) ceases to be a Scheme Employer, the Pension Fund s Administering Authority is required to obtain an actuarial valuation of the liabilities of current and former employees as at the termination date. Further, it Cessation Policy September 2012 Page 2
requires the rates and adjustments certificate to be amended to show the revised contributions due from the employer. Regulation 38(2) states that where an admission body gives notice of either a material change in the terms and conditions of employment which affect entitlement to benefits under the Scheme for its employees; or if there is a change in status which affects its participation in the Scheme which results in the admission agreement ceasing to have effect, then the Administering Authority is required to obtain an actuarial valuation of the liabilities of current and former employees as at the termination date. Further, it requires the rates and adjustments certificate to be amended to show the revised contributions due from the employer. Regulation 38(3) states that in instances where it is not possible to obtain additional contributions from the employer leaving the Pension Fund or from the bond, indemnity, or guarantee, then the contribution rate(s) for the appropriate Scheme Employer (in the case of Transferee Admission Bodies ( TABs )) or remaining Pension Fund employers may be amended. Regulation 38(4) states that the Administering Authority may obtain a certificate from the Actuary revising the contributions for an employer leaving the Pension Fund. This is to ensure that the assets and liabilities of the employer are broadly expected to be in balance when the admission agreement ends or at the date agreed between the Administering Authority and employing authority. The Local Government Pension Scheme (Miscellaneous) Regulations 2012 extended Scheme regulations to cover any employing authority that ceases to be a Scheme Employer. It is, therefore, the Pension Fund s Policy to apply, as far as possible and where appropriate, the principles stated in this Policy to both outgoing admitted bodies and scheduled bodies. 1.4 Policy Review This Policy will be reviewed at least every three years following triennial valuations or following changes in the Regulations relating to employers leaving the Pension Fund. This Policy is not exhaustive and individual circumstances may be taken into consideration where appropriate. Any queries should be directed to Patrick Towey, Group Manager, Herts Finance Service in the first instance at patrick.towey@hertfordshire.gov.uk or on 01992 555148. 1.5 Overriding Principles When an employer leaves the Pension Fund, a valuation of the employer s liabilities at the cessation date will be carried out by the Actuary to determine the level of any surplus or deficit of the employer s share of the Fund at the termination date. In the first instance, the Pension Fund will pursue payment of any deficit from the outgoing employer or draw on any bond or indemnity provider and guarantor. The Pension Fund will also pursue payment from any liquidator, receiver, administrator or successor body. The Policy is to minimise, as far as is Cessation Policy September 2012 Page 3
practicable, the financial risk to remaining, unconnected employers in the Pension Fund in having to make future contributions relating to the past service liabilities of current and former employees of employers leaving the Pension Fund. The protection afforded to Scheme Employers in relation to TABs is enhanced by provisions where any shortfall attributable to the employer, including responsibility for any deferred and pensioner members of the employer, fall back to the original outsourcing Scheme Employer. The bases currently in use for cessation valuations are set out in Appendix A. These bases may be updated or withdrawn at the discretion of the Administering Authority on the advice of the Actuary. They will be reviewed at the 2013 Valuation and this Policy will be updated and republished and effective from 1 April 2014. The Administering Authority, on advice from the Actuary, will determine the most appropriate basis for each case. Generally, this will be on a more prudent basis than that used to determine employer contribution rates at triennial valuations. 1.6 Interaction with the Funding Strategy Statement The Pension Fund s Policy is that each employer is responsible for the funding of all Scheme benefits of its own members, including current and previous employees. Details are set out in the Fund s Funding Strategy Statement including arrangements for avoiding cross-subsidies between employers. While employer contributions may be pooled in the interests of stability and administrative ease for the purpose of triennial funding valuations, the individual funding position for each employer is tracked by the Actuary at each triennial valuation. Any cessation valuation will be carried out using assets and liabilities allocated to the employer at the last triennial valuation as a starting point. This position will be updated to allow for membership movements and market conditions as at the cessation date. 1.7 Principles for Determining Payment The Actuary will determine the deficit / surplus attributable to the employer on cessation. If an employer is aware that it will be leaving the Pension Fund, it should alert the Pension Fund and request an indicative cessation valuation under Regulation 38(4). If this valuation indicates that a surplus position is likely, then the Actuary will be able to advise the Administering Authority whether a contribution reduction (before the employer ceases) is appropriate. If the employer is in surplus, according to Scheme regulations, there is no mechanism by which the surplus can be repaid by the Pension Fund. If there is a deficit and the employer is required to make a payment then the Pension Fund will advise the employer of the amount required and payment arrangements. The Pension Fund s Policy is for any deficit on cessation to be recovered through a single lump sum payment to the Pension Fund. The Pension Fund may consider allowing certain employers to spread payment over an agreed period where it Cessation Policy September 2012 Page 4
considers that this does not pose a material risk to the solvency of the Pension Fund. If the payment is to be spread, the Pension Fund will consult with the Actuary to determine an appropriate financial repayment plan. Generally, the outgoing employer will not be exposed to interest rate, investment or other funding risks after the cessation date. The final deficit payment will be calculated by the addition of interest at the level of the base rate between the cessation date and the final payment date(s). Exceptions to this may be made where the Pension Fund is not advised in a timely manner of the cessation date of the employer. Costs associated with cessation, will be recharged to the departing employer in accordance with the Pension Fund s Charging Policy. 2. Process and Responsibilities 2.1 Responsibilities of Ceasing Employers An employer must advise the Pension Fund when its participation is likely to cease. TABs and Community Admission Bodies (CABs) must advise the expected termination date of its admission agreement within the terms of that agreement; or otherwise as required by the Regulations where three month s notice is required. This includes closed employers where the last active employee member is leaving whether due to retirement, death or otherwise leaving employment. Information on circumstances or events that would lead to an admission agreement ceasing can be found in an employer s admission agreement. Scheduled bodies must advise its intention to withdraw its participation in the Scheme and the date this will be effective. In all cases, the employer must: confirm its intention in writing; and provide any relevant information on the reason for leaving the Pension Fund and appropriate contact information; provide confirmation to the administering authority on the bond/indemnity or, where applicable, alternative guarantor in place; and provide all other information and data as requested by the Pension Fund, including any changes to the membership which could affect the liabilities (e.g. salary increases and early retirements). This includes details about the treatment of current employee members on cessation and whether they will transfer to another Pension Fund employer or if they will cease to accrue benefits within the Pension Fund. Cessation Policy September 2012 Page 5
2.2 Responsibilities of an Outsourcing Scheme Employer An outsourcing Scheme Employer must: advise the Pension Fund in writing as soon as it is aware that the participation of one of its contractors in the Pension Fund is due to cease, whether this is the natural end of the contract or earlier cessation; support the Pension Fund in gathering all information and data from the ceasing employer required for the cessation valuation; support the Pension Fund in obtaining payment of any deficit amount due from the contractor; accept responsibility for any residual liabilities or financial risk associated with the affected employees (including ex-employees) of the contractor. 2.2 Responsibilities of the Administering Authority The Administering Authority will: gather required information, including, but not limited to: - the reason the employer is leaving the Pension Fund and any supporting documentation that may have an effect on the cessation; - complete membership data for the outgoing employer and details of any changes since the previous formal valuation; and - details of the treatment of current employee members and whether they will transfer to another Pension Fund or Pension Fund employer, or if they will cease to accrue benefits within the Pension Fund; Identify the party that will be responsible for the payment of any funding deficit or who will be responsible for meeting the ongoing liabilities in respect of the employer on cessation; Commission the Actuary to carry out a cessation valuation under the appropriate regulation; Where applicable, discuss with the employer the possibility of paying adjusted contribution rates that target a 100% funding level by the date of cessation. This may require increased contributions in the case of a deficit on cessation or reduced contributions for a surplus on cessation ; Where applicable, liaise with the original ceding Scheme Employer or guarantor to ensure it is aware of its responsibilities, in particular for any residual liabilities or financial risk associated with the outgoing employer s membership not covered by any bond or indemnity; and On advice from the Actuary, notify the employer and other relevant parties, in writing, of the payment required for any deficit on cessation and pursue payment. Cessation Policy September 2012 Page 6
2.3 Responsibilities of the Actuary Following the commissioning of a cessation valuation by the Pension Fund, the Actuary will: calculate the surplus or deficit attributable to the outgoing employer on an appropriate basis, taking into account the principles set out in this Policy; provide actuarial advice to the Pension Fund on how any cessation deficit should be recovered from the ceasing employer or any bond or indemnity, giving consideration to the circumstances of the employer and any information collected about the cessation; and where appropriate, advise on the implications of the employer leaving on the ceding Scheme Employer or guarantor, or the remaining Pension Fund employers, including any residual effects to be considered as part of triennial valuations. Cessation Policy September 2012 Page 7
APPENDIX A Cessation Valuation basis The following bases will apply from 1 January 2011 to 31 March 2014, unless otherwise withdrawn or updated by the Administering Authority on the advice of the Actuary. Gilts Discount Rate The annual yield on gilts published in the FTSE Actuaries UK Gilts Service (over 15 years) as at the date of cessation, rounded to the nearest 0.1% per annum. Ongoing Discount Rate The annual yield on gilts as published in the FTSE Actuaries UK Gilts Services (over 15 years) as at the date of cessation plus 1.6% per annum, rounded to the nearest 0.1% per annum. Price Inflation Geometric difference between the annual yield on gilts as published in the FTSE Actuaries UK Gilts Service (over 15 years) and the annual yield on index-linked gilts as published in the FTSE Actuaries Index-Linked Gilts (3% Inflation) Yield Series (over 15 Years) as at the cessation date, rounded to the nearest 0.1%. Pension increases Price inflation as calculated in 4.3 above, minus 0.5% to allow for the future indexation of pensions with CPI. Salary Increases (Where Applicable) As determined in the most recent valuation of the Fund, assumed salary increase will be 1.5% above price inflation. Other Demographic Assumptions As set and outlined in the latest formal Valuation Report for the Fund. Under a gilts basis, allowance may be made for future improvements in life expectancy beyond those outlined in the most recent formal valuation of the Fund. Cessation Policy September 2012 Page 8