Most employers will now have received their results from the local government pension scheme's three-yearly valuation. For many, a previously unaffordable exit payment may now be much smaller or have even become a surplus.  

What's changed?

The yields (or interest) on government bonds (or gilts) have risen significantly on the back of higher interest rates and quantitative tightening, as well as in response to Liz Truss' disastrous mini-budget. With exit payments often based on using gilt yields to discount the value of liabilities, the rise in yields has meant a corresponding fall in exit valuations for some employers.

So are employers looking to leave?

Anecdotally, we're aware that some employers are reviewing their position and making active plans to exit - either with the benefit of a surplus or a much more affordable exit payment. For those who still have a deficit, a debt-spreading agreement or possibly a deferred debt agreement may be attractive (read our ebriefing for more information). Employers should note however that, with the current economic picture looking more unpredictable than in recent times, there's no guarantee that the current favourable conditions will still apply by the time an employer is ready to exit. Employers who have already considered exiting and have a plan in place are more likely to be able to take advantage of the current situation.

For employers thinking of leaving, there are a number of things to consider including:

• whether it is possible to exit;
• consulting with staff; 
• changing employment terms; 
• the cost of doing so.

What might this mean for LGPS funds?

Not all employers are able to exit, as many will have an obligation to continue to participate including local authorities, academies and those providing services to them. Nonetheless, where employers do exit with lower exit payments or perhaps an exit credit due to a surplus, funds will have less money to pay benefits. In the context of a 10% rise in pension payments due to inflation and an increase in the number of staff opting out of pensions due to cost of living rises, keeping a close eye on cash flows to ensure that pensions in payment can be paid as they fall due will be important.

Funds may wish to consider whether:

• to revise the basis on which exit valuations are carried out;
• to look at interim valuations outside the normal three-yearly cycle; 
• to consider the factors they take into account when exercising their discretion to pay an exit credit.

For help with these or other issues relating to the local government pension scheme, contact Doug Mullen.