On 2 April 2025, changes were made to the Local Government Pension Scheme ("LGPS") exit credit regime in Scotland by the Local Government Pension Scheme (Scotland) (Amendment) Regulations 2025.
The amendments were introduced by Scottish Ministers to address concerns about the previous regime, and provide administering authorities with sufficient flexibility to determine the amount of any exit credit payable to a scheme employer when they leave the LGPS in Scotland. The new provisions apply to exit credits paid on and from 2 April 2025.
What has changed?
Under the previous regime, where a scheme employer elected to exit the LGPS in Scotland, or otherwise ceased to have any active members (and no prospect of enrolling new members) and a surplus was identified at the exit date, an exit credit would automatically become payable to the exiting employer.
Under the new regime, administering authorities have flexibility to take certain aspects into account when assessing whether there is an exit credit, and the amount of any exit credit payable (which could be zero). Specifically, they must consider factors such as:
- the amount of surplus relating to the exiting employer,
- the proportion of the surplus which has arisen because of the employer's contributions,
- any representations to the administering authority made by the exiting employer and other interested party, which for employee admitted under an admission agreement is likely to include any guarantor and/or other party to the admission agreement,
- any prescribed guidance or statement relating to the preparation of a funding strategy statement; and
- any other relevant factors (which is obviously very broad).
The amendments also require administering authorities to exercise that discretion within six months of the employer exiting the scheme, but there is flexibility for a longer timescale to be agreed by both parties, as necessary. This is to ensure that any exit credit is paid within a reasonable time.
What is the purpose of the changes?
The amendments were introduced by Scottish Ministers following a consultation by the Scottish Public Pension Agency ("SPPA") in May 2024 and broadly align with the approach that has been in place in England and Wales since March 2020 - when the provisions in the equivalent scheme were amended. Prior to that the provisions in England and Wales mirrored the position under the previous regime in Scotland.
The amendments to the LGPS in England and Wales were introduced after it became clear that, in certain circumstances, the provisions could result in exit credit payments being disproportionate to the risk that exiting employers have taken on whilst contributing to the fund. For example, in relation to outsourcing of services of service by local authorities where there is a 'pass through arrangement' in place, meaning that the contractor’s liabilities to the pension fund and the pensions risk remains with the local authority throughout the life of the contract.
The lawfulness of those amendments was later challenged by contractors in the case of R (Enterprise Managed Service Ltd) v Secretary of State for Housing, Communities and Local Government [2021] EWHC 1436 (Admin) (27 May 2021). However, the amended provisions were found to be lawful on public interest grounds to prevent windfalls for exiting employers, particularly in an outsourcing situation.
It is acknowledged in the response to the SPPA consultation published earlier this year that in Scotland ‘pass-through arrangements’ are rare and so fund authorities did not see the need for a similar change to the regulations in Scotland. However, there are concerns that the significant improvement to the funding position in the Scottish LGPS confirmed by the 2023 Actuarial Valuation and resulting increase in pension exit credits funds that funds required to pay may have a negative impact on cash flow and result in any subsequent risk being passed on to the remaining employers of the funds.
What does this mean for employers exiting the LGPS in Scotland?
Scottish administering authorities must now update the Funding Strategy Statement (FSS) to set out their published strategy on how exit payments will be calculated and how their discretion will be applied. To ensure a consistent approach is taken, the SPPA intend that Scottish administering authorities adopt the approach set out in guidance recently published by the Local Government Pension Scheme Advisory Board in England and Wales - which is intended to help administering authorities create their funding strategy but without being prescriptive in the policy approach to take. The guidance provides where the fund has discretion in decisions on the level of exit payment to be paid, the FSS should set out the factors that may be considered and the process to be followed in exercising that discretion.
Conclusion
The extent to which the new regime will have an impact in practice has yet to be determined but drawing on experience from England and Wales, it is likely that the policy approach on calculating the amount of exit credit when an employer exits will vary from fund to fund. Employers who may be considering, or indeed approaching, an exit from the LGPS in Scotland should liaise with its advisors at the earliest opportunity to understand the relevant fund's policy and any bearing that this may have on the employer's proposed exit strategy.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pension team or your usual Brodies contact.
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