Risk sharing arrangements should be agreed between the letting employer / employer with a community of interest, and the prospective admission body, as part of the contract/agreement: However, our preferred approach is a pass-through arrangement with a fixed contribution rate.
Stand-alone
Under a stand-alone arrangement, the LGPS assets and liabilities relating to the transferred employees are allocated to the admission body when it commences its participation in the Fund. Our Actuary will calculate an LGPS employer contribution rate and assess the level of financial risk exposure to the Fund, should the admission body have a deficit in its funding position when it ceases participation in the Fund.
To protect the Fund against this risk, the admission body will normally be required to arrange an appropriate level of security. This may be by entering into an agreement with the Fund and a bond provider, or other suitable guarantor, for the level of risk exposure recommended by the Fund’s Actuary.
Under a stand-alone arrangement, the admission body is responsible for its own funding position and any deficit that may arise during its participation in the Fund.
Pass-through
Where an admission body has agreed a pass-through with an LGPS employer, such as a local authority or Multi-Academy Trust, responsibility for pension funding risks remains with the employer providing the pass-through arrangement. As the pension funding risk remains with the LGPS employer, no bond or guarantee is normally required.
A pass-through arrangement may also include an agreed LGPS employer contribution rate to be paid by the admission body often mirroring the rate paid by the employer providing the pass-through. This can provide greater certainty over pension costs and help prospective admission bodies to forecast the cost of their participation in the LGPS.
As the pension funding risks remain with the LGPS employer, responsibility for reflecting the arrangement in the employer's accounts and financial statements will generally also remain with that employer.
Comparison
The following tables shows the differences, for the parties involved, between a stand-alone arrangement, a pass-through and a pass-through with an agreed LGPS employer contribution rate.
Stand-alone
| Member | No difference, member remains eligible for LGPS membership. |
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| Letting employer |
Increased time and expense in pre-contractual negotiations, particularly if prospective actuarial report is required.
Potential legal fees if advice sought for a bond or guarantor agreement.
Hands responsibility for pension liabilities to the admission body.
Employer rate not immediately available.
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| Admission body |
At risk of paying a higher employer rate than the letting employer.
Transferred liabilities could be factored into the contract price, potentially making it harder to be competitive.
Responsible for future liabilities, which are unknown until the end of contract.
Employer rates can vary significantly between triennial Fund valuations, compared with other employer types.
Cost and time of procuring and maintaining a bond, which the parties will need to wait for the Actuary to determine the value of.
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Pass-through
| Member | No difference, member remains eligible for LGPS membership. |
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| Letting employer |
Lower actuarial fees as no prospective quote required.
Similar contracts can be drafted and priced on the same basis without having to factor in extra pension and legal costs.
If a funding surplus is identified at cessation, the employer will have this amount added to their funding position.
Employer rate not immediately available if not pre-agreed.
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| Admission body |
Certainty of financial outlay. No risk of having to make deficit payment at end.
Not subject to volatile funding conditions.
Employer rate not immediately available if not pre-agreed.
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Pass-through with agreed employer contribution rate
| Member | No difference, member remains eligible for LGPS membership. |
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| Letting employer |
Quicker admission process as no need to wait for the actuary to calculate rate.
Defined rate can attract more interest in contracts out for tender.
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| Admission body |
High level of certainty of cost of participation in the Fund.
Can begin paying contributions to the Fund straight away.
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