Employers failing to grasp LGPS costs and ‘responsibilities’

Speaking at the Pensions and Lifetime Savings Association’s local authority conference on June 14, GMPF’s Euan Miller acknowledged a surge in employer numbers, a trend partially driven by the transformation of many English schools into academies.

“Employers are not fully understanding their obligations and responsibilities to the scheme,” he said.

“As well as the administrative demands on employers, research highlighted that it’s not uncommon for new employers to be surprised by the cost of the LGPS — both the ongoing contribution rate, which is not always known prior to entry, and the potential exit costs, which can be unaffordable to employers.” 

It’s not uncommon for new employers to be surprised by the cost of the LGPS

Euan Miller, Greater Manchester Pension Fund

New research from the PLSA into the LGPS concluded that public sector reforms have left many local authority funds needing “to bridge large gaps in employers’ knowledge and understanding about LGPS employers’ responsibilities to the scheme and to its savers”.

“It remains unclear who is responsible for ensuring employers have appropriate knowledge of the LGPS, as there is no single entity with the needed powers looking at the LGPS as a whole,” the report said.

“There is also an unclear hierarchy of authority of external governing bodies. As such, this is an example of how and why LGPS funds are taking increasingly individualised approaches based on local interpretations of guidance.”

The PLSA mooted creating a new body, or giving an existing organisation greater powers, in order to help bring about “a more centralised approach” to LGPS regulation and the scheme’s operating environment.

Approaches diverge between LGPS funds

The PLSA’s report revealed a reasonably healthy level of understanding of employers’ needs among funds, with 60 per cent of respondents rating their grasp of their employers’ requirements as at least “very well”. Thirty-seven per cent said they understood their employers’ needs “somewhat well”.

The affordability of the scheme, however, is apparently presenting a growing challenge for employers. “There is anecdotal evidence of an increase in the frequency of requests to leave the scheme,” the report stated.

Affordability represented the main reason for employers expressing a desire to leave the scheme, with this being the motivation for 88 per cent of employers.

“How can funds ensure that when services are being tendered, or when plans for academy conversions are being formed, that the prospective new employer is fully aware of the implications of being an LGPS employer?” Miller asked.

“This is also an area where approaches can diverge between LGPS funds, with funds and their actuary having some discretion on things like the opening funding level of the new employer and risk-sharing arrangements.”

He suggested that the introduction of employer flexibility provisions into regulations several years ago may have made exiting the LGPS more attainable to employers.

Policy reforms have increased the burden on LGPS funds

Education reforms have played their part in the surge in employer numbers. The GMPF had 37 employers when it was created in 1974. This figure rose to 342 in 2013 and currently stands at around 650. 

The Academies Act 2010 transformed a substantial amount of schools in England into academies. They are employers in their own right within the LGPS, and are generally open to new recruits accessing the fund.

Academies commonly outsource functions such as cleaning and catering, which can also increase LGPS membership. 

In March, the £2.76bn Bedfordshire Pension Fund’s committee approved a plan to pool its academy liabilities in an attempt to reduce the volatility caused by members entering and exiting the scheme.

Around a third of schools have converted to academies in the Greater Manchester area, Miller said. The rise in employer numbers increases LGPS funds’ administrative work, with GMPF typically processing around 50 employer applications at any one time.

As the number of employers rises, LGPS funds are also required to work with employers that are less familiar with the pension scheme and without dedicated pensions expertise and resources, he pointed out.

Local authority schools, which are not employers in the LGPS in their own right, are allowed to appoint their own payroll providers instead of the council payroll function, which can lead to a worsening in data quality, Millar added.

He described this as an example of central government policy decisions that “introduce unhelpful complexity for the LGPS that we just have to cope with and deal with”.