Steve Simkins outlines some of the complex challenges that the conversion of schools to academies are posing to administering authorities of the LGPS.
The finer details of the way that Local Government Pension Scheme (LGPS) funds in England process academy conversions are gradually coming to light. In addition to the headache this causes for academies themselves, this might create some unexpected future challenges for the administering authorities and the local authorities whose schools have embarked on this journey
For a few years the focus was on recovery periods and if, with no formal guarantee for academies from the Department for Education (DfE), they should be shortened to as little as seven years. Then a commitment of sorts was made by DfE and most LGPS Funds reverted to longer recovery periods in line with local authorities.
But discussions around whether cash contributions should be paid sooner rather than later can mask an underlying issue. Yes, once academies have converted and their conversion deal is done, their ongoing LGPS obligations need to be managed in the normal way. But the most important issue is what happens at conversion and this can easily slip through the net.
At the point of conversion a decision is made by the LGPS fund concerned, about the amount of assets to be allocated to the academy. This is a final decision and every pound allocated on conversion is a pound that the academy will not have to pay to the fund. On the other hand, a decision by the actuaries after conversion about how contributions need to be paid only determine whether a pound should be paid now or later – it is not a value decision.
So what happens at conversion? To put it mildly, it’s not entirely clear. Until recently, studies into academies and their LGPS participation have shied away from looking at it. However, a recent report from the Government Actuary’s Department is heading in the right direction and has identified some of the issues.
To be fair, it’s complicated. Firstly, a decision needs to be made in principle around whether a fully-funded transfer of assets should be made (this would mean that the transferring active members’ liabilities are fully covered on day one). Secondly, actuarial assumptions need to be determined which, especially if deficits are to be passed from local authority to the new academy, make a very significant difference to the outcome.
This is just the tip of the iceberg. LGPS actuaries tend to review their approach to actuarial assumptions from valuation to valuation. So how do they set their assumptions in between valuations and what about the academies who convert the day before and the day after a change in approach? Also, what data do they use (if any) to allocate an appropriate deficit in respect of former employees of the school?
Different funds are making different decisions and using different assumptions. As an experienced actuary, having spent some considerable time getting to the bottom of this, I only just understand it. So an academy with limited funds on conversion has very little opportunity to consider this before it is too late.
With very few exceptions LGPS funds allocate a share of the ceding local authority’s deficit to the academy, normally in respect of all former school employees. However, it is interesting to note that in nearly all other situations that I know of, when a transfer is made from a local authority to a new employer (such as a housing association or NHS Trust) a fully-funded transfer is made. And to add to the mix, with recent strong asset returns, a number of local authorities are keeping hold of surplus assets, which appears to be a one-way bet in their favour.
It doesn’t need to be this complicated and it doesn’t need to be this opaque. There is an LGPS regulation that requires a transfer from one fund to another to be agreed between the two actuaries, which is right and in line with how bulk transfers are dealt with across the pensions industry. On the other hand, allocations from one employer to another within a fund do not require the same careful scrutiny. If an agreement between two actuaries had been a requirement from the start, we may now be in a different place.
Finding a solution is going to be hard. Any move to get things right for future conversions may highlight the inherent issues in the many thousands of conversions that have taken place to date. But unless this is looked at openly and with transparency, these issues will continue to be stored up for the future.
Steve Simkins is the head of public sector pensions at KPMG UK.
