These amendments provide administering authorities with the discretion to determine the amount of an 'exit credit', by considering the factors specified in the 2025 Regulations. This applies when an employer wishes to exit the LGPS fund, effective from 2 April 2025. These amendments largely mirror similar provisions which have been introduced in England and Wales.
Past vs. Present
Previously, when a surplus existed within the LGPS fund, the fund was required to pay an exit credit to a departing employer, valued upon a cessation basis. This has become more affordable due to the significant improvement in the funding position of LGPS funds.
While some employers understandably wanted to de-risk their LGPS fund liabilities after years of being in deficit, Trade Union representatives raised concerns that more employers may have left the fund to benefit from higher exit credits. This could potentially affect an employee's future pension provisions if alternative pension arrangements are not equivalent. Conversely, non-profit organisations and other employers are concerned that the 2025 Regulations may allow funds to pay little or no exit credits to departing employers.
The changes provide administering authorities with greater flexibility, allowing them to pay an exit credit at their discretion and consider several factors in determining its value.
Likely considerations for funds in assessing a potential exit credit include:
- The existing level of surplus within the fund.
- The level of risk borne by the departing employer within the context of the fund, including the value of the employer's contributions.
- Representations made by any guarantors or fund employers in connection with the exercise of their functions, such as providing a service or assets, who must be notified by the administering authority.
- The fund's own policy on cessation as noted in their Funding Strategy Statement ("FSS").
A Different Approach for Employers
A different approach will likely be taken for different types of employers. For example, a contractor in a 'pass through' arrangement will be treated differently to other third sector employers who have previously borne the risk and paid deficit payments.
As such, it will be imperative that any employer understands the fund's FSS and policy for calculating or permitting the payment of an exit credit.
Additionally, great care and consideration should be taken in any decision to make a proposal to change an employee's LGPS membership and pension provision going forward. This will require consultation, negotiation and likely amendments to employment contracts.
Final Thoughts
MFMac regularly advises LGPS employers, charities and third sector organisations in Scotland who are likely to be impacted by these changes. Please contact us if you would like advice or assistance.
This article was co-written by Matthew Paton, Trainee Solicitor in our Pensions team.
