Barry McKay unpicks the recent report for the Local Government Pension Scheme Advisory Board looking at issues facing Tier 3 employers in the LGPS.
In September, professional services firm Aon released a report, commissioned by the Local Government Pension Scheme Advisory Board (SAB), identifying potential issues surrounding the participation of Tier 3 employers in the LGPS.
In case you haven’t had time to read all 102 pages, we have set out some of the key issues and findings.
In simple terms, Tier 3 employers have no guarantee or backing from another LGPS employer or other form of security – and there are 1,750 of them in the LGPS with a liability totalling around £27bn.
Tier 3 employers cover a diverse range of employers including charities, housing associations, universities and higher and further education colleges
The report has a lot of ground to cover and gathered information from a range of stakeholders: Tier 3 employers, their employees, administering authorities and the actuarial firms that advise LGPS funds.
It provides a comprehensive framework to facilitate discussions about the issues surrounding Tier 3 employers.
The concerns of each stakeholder group have been collated and are presented along with possible options to address each concern.
Aon were set clear boundaries in that they were not asked to make any specific recommendations, which is why the report is set out in this way.
The next steps will be for a small working group of SAB members to take this forward to consider how to resolve some of the issues raised.
Communication issues
A few issues arise repeatedly from all stakeholders.
The first is engagement in general with the fund.
The responses indicate that the administering authorities want more engagement with all employers, not just Tier 3; and employers want more engagement with administering authorities!
So where is the mismatch? It relates to another common issue: communication.
All parties responded that there was room for improvement in communication between everyone, both in quality of communication of all types and in accessibility to information and discussions.
These two particular issues go hand-in-hand when the administering authorities want the employers to engage but the employers (and their employees) can’t gain access in a way that works for them.
Typically, the hardest to reach employers are often the ones that would benefit most from increased engagement.
There is no easy solution, but surely the benefits of effective engagement would outweigh the costs and resources needed in the longer term?
A lot of the existing issues could be partly addressed by improving communication all round. For example:
- employers feel that members don’t understand the value of their benefits;
- members want more flexibility in the benefits on offer in the LGPS; and
- administering authorities want employers to understand their responsibilities.
Once all the parties understand each other a bit better, they can move onto the more thorny issue of how best to manage their involvement in the LGPS.
Although categorised together in the LGPS, these different sectors have very little in common with each other.
A small, local charity is very different to a large university in terms of financial strength, resources, pensions’ expertise and even demographics of membership.
Tier 3 employers therefore need more bespoke funding strategies and certainly more work has been done in this area at recent actuarial valuations.
Transparency
A recurring theme from employers in all sectors is a desire for more transparency from the administering authorities and more influence in the running of the scheme, including in investment and funding strategies.
However, engagement and communication will not address the much bigger issue of cost of participation.
The report sets out how these employers might continue to participate in the LGPS, what accommodations might be made to reflect their atypical characteristics and what should happen on exit.
The more interesting options include:
- changes to regulations and member benefits to cap costs or radically alter the treatment of Tier 3 employers with, say, bespoke investment strategies (although this is likely to increase costs further);
- new sections in the LGPS; or
- the introduction of an LGPS Pension Protection Fund.
The report focusses heavily on the exit of Tier 3 employers from the LGPS, raising the question of whether these employers should continue in the LGPS in principle or whether their needs would be better met elsewhere.
To exit the LGPS can be challenging for Tier 3 employers either because it is simply not allowed for scheduled employers, or because they are trapped by high exit costs as admission bodies – too expensive to stay and too expensive to leave.
More work to come
There is a desire for more flexibility from both administering authorities and employers around exiting the scheme.
The Aon report is a first step towards improving the key stakeholders’ experience of the LGPS to provide pension solutions that meet their needs of members, their employers and the administering authorities.
The response rate was considered to be good with a reasonable spread of representation between sectors and stakeholders, though the member responses represent less than 1% of all the LGPS members who are current or former employees of Tier 3 employers.
This is an initial discussion document which specifically avoids making any recommendations – so there is more work to come.
The next stage of the project will be taken on by a small working party made up of members from the SAB, which will consider the report to find ways that the issues raised could be resolved.
It is likely that future levels of interest and engagement from stakeholders will be higher once it becomes more clear which options, as suggested by the board, will come under serious consideration.
Dr Barry McKay is associate actuary at Barnett Waddingham LLP
