Teal blue graphic

Staff mutuals - how will staff pensions be affected?

When employees in a public service pension scheme are transferred to a new employer, their pension rights enjoyed under the pension scheme benefit from a protected status because of 'Fair Deal'.

All the public service pension schemes have similar protections for employees. However for the purpose of this article we have considered the Local Government Pension Scheme (LGPS). You should seek further guidance for other pension schemes.

Key implications of the LGPS 

The risks and expenses that come with LGPS obligations, which are inherited by virtue of legislation and Fair Deal policies, must be considered carefully. The LGPS is a funded public service pension scheme and members are entitled to high value benefits. 

Where transferring employees are members of the LGPS then the staff mutual will need to become an 'admitted body' so that it can provide employees with continued LGPS rights. It is worth noting that the ability to become an admitted body is only available for the LGPS. 

It is important to ensure that arrangements are in place which will protect against increases in ongoing contributions and fund any deficit. Consideration should also be given as to what will happen on exit from the scheme. 

Becoming an admitted body

Fair Deal 2013 guidance introduced new provisions, giving all members of the LGPS the right to remain in the LGPS. As staff are transferring from a public sector organisation to the staff mutual, the staff mutual will need to become a participating employer in the LGPS. This would  normally take place by the staff mutual entering into an admission agreement and bond or indemnity with the transferring local authority or public body. 

The admission agreement (AA)

The AA should be negotiated at the same time that the terms of business for the staff mutual are agreed. This will ensure that, before any transfer of employees takes place, the AA has not only been drafted to reflect the terms of business, but also to take into account any specific requirements of the staff mutual and detail how any costs will be dealt with. 

In addition the staff mutual, as an employer, may be required to provide an indemnity, guarantee or bond to protect the scheme from possible costs arising from the employer's participation in the scheme eg if the employer were to become insolvent. Any security will be subject to regular review and the employer may be required to provide additional funds following such review. 

Contribution rates

Employees and the staff mutual, as an employer, will have to contribute to the scheme at the same levels as their public sector equivalents. 

Guidance indicates that LGPS funds will be permitted to take into account the risks of default attached to LGPS employers and to raise employer contributions to reflect this. Such decisions will be made by the scheme's actuary. 

Agreeing a fixed rate of contributions will protect the staff mutual and, although the contributions which the actuary dictates will remain binding on the staff mutual, it is common for provisions to be inserted into the arrangements which require the authority to reimburse the employer for contributions over and above the agreed fixed rate. In agreeing a fixed rate of contributions, there is a commercial gamble to be taken and actuarial advice should be sought by any parties wishing to use this approach. 

The basis of calculation of contributions often assumes that all transferring employees' benefits are fully funded at the point of transfer.

What happens on exit from the LGPS?

If the admission agreement terminates, there will be a risk of a deficit on exit from the LGPS. Guidance states that the scheme manager (ie the LGPS organisation) will be able to charge the staff mutual for such a deficit. The possibility of a deficit needs to be considered and provisions inserted into any arrangements between the staff mutual and the public sector organisation to deal with it. 

Staff mutuals need to ensure that they are not paying for deficits which relate to periods before the employees transferred to them. The staff mutual and public sector organisation should agree the approach to this and insert appropriate provisions into the arrangements and the AA. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

Also in this series

Insights & events View all