Outsourcing employers and their contractors are advised to consider and understand the Local Government Pension Scheme (LGPS) funding arrangements. We recommend that appropriate advice and guidance is sought, and agreements for related risks and responsibilities are included in the final contract.
Funding the LGPS
The LGPS is funded by member contributions, employer pension contributions and earnings from investments.
Each employer’s funding position is individually tracked and monitored during its participation with a view to it being funded sufficiently to pay retirement benefits for all current members and former scheme members.
Where assets don’t meet the value required to cover the pensions rights which scheme members have built up, the employer’s funding position is in deficit. Alternatively, where assets outweigh the pension liabilities, it is in surplus.
Every 3 years, our actuary undertakes a mandatory valuation of each employer’s funding position, which may result in the initial employer contribution rate being adjusted.
Risk sharing arrangements
When a new employer becomes an admission body it is agreeing to its financial obligations and the risks which participation in the LGPS brings.
The obligations include:
- paying employer contributions, normally at the rate determined by the actuary
- any pension shortfall costs (for instance when employees are made redundant)
- at the point of exiting the LGPS, any payment which may be required to cover a deficit in funding(or arrangements should there be a payment due in respect of a surplus funding position)
When an employer outsources part of its functions or services, it can agree to share the risks associated with being an LGPS employer with its chosen contractor.
Risk sharing arrangements agreed between the parties are normally included in the service contract and administered outside of the fund.
There are various risk sharing mechanisms that can be agreed such as 'pass through' or 'cap and collar' where the outsourcing employer agrees to take some or all the pension risks, such as deficit payments. Where such arrangements aren’t agreed, the contractor is responsible for its own financial obligations.
The employer who outsourced the contract remains the 'guarantor of last resort' where the contractor fails to fulfil its payments to the fund.
Outsourcing employers and contractors should always seek appropriate legal advice on any risk sharing arrangements.