By Barry McKay, FFA, Associate and Fund Actuary at Barnett Waddingham
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.
Aon gathered information from a range of stakeholders: Tier 3 employers, their employees, administering authorities and the actuarial firms that advise LGPS funds. The report provides a comprehensive framework to facilitate discussions about the issues surrounding Tier 3 employers.
A few issues arise repeatedly from all stakeholders, the first being engagement with the fund. 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 want improvements in communication, particularly in accessibility to information and discussions.
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. 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. There is no easy solution but the longer-term benefits of effective engagement would surely outweigh the costs and resources needed.
However, engagement and communication will not address the 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 the Regulations and member benefits to cap costs or radically alter the treatment of Tier 3 employers with new sections in the LGPS or introduction of an LGPS Pension Protection Fund.
The report focusses heavily on the exit of Tier 3 employers from the LGPS and the challenges of leaving; it is simply not allowed for scheduled employers, and admission bodies are trapped by high exit costs - too expensive to stay and too expensive to leave.
The report 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 Scheme Advisory Board who 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.
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