Leaving the Fund

This page provides information on exiting the Avon Pension Fund (APF) and relevant considerations for the different types of Scheme Employer, in particular:

• Circumstances that trigger an exit or termination.
• Termination process for Scheduled, Admitted, and Designating bodies.
• Financial implications of leaving.
• Approach when an outsourcing is re-tendered.

As this process occurs at the end of a Scheme Employer’s participation in the APF, you may find it useful to read the other guides around joining the Fund, considerations when outsourcing staff (TUPE), setting employer contribution rates and the Funding Strategy Statement, as each of these documents provides further information on participation in the APF.

If you have a contract coming to an end, or are expecting an imminent exit as a result of any of the situations discussed in this guide, please contact the Actuarial team at APF_EmployerValuations@bathnes.gov.uk at the earliest opportunity so this can be discussed further.

Different types of employers in the LGPS

In the Local Government Pension Scheme (LGPS), there are broadly three types of Scheme Employer: Scheduled Bodies, Admitted Bodies and Designating Bodies. Each have specific processes when joining or leaving the Fund, so it’s important for Scheme Employers to understand which category they fall under:

Scheduled Bodies: These are Employers who are required as per the LGPS Regulations to offer LGPS membership to their eligible staff.  The term “Scheduled” includes entities like county councils, district councils, combined authorities, universities, colleges, and academies (the term “Scheduled” is used because these entities are listed in a schedule to the Local Government Pension Scheme Regulations).  

Admitted Bodies: These are Employers who have eligible members and must apply to join LGPS. This can happen when a service is outsourced by a Scheme Employer (normally a Scheduled Body) either to a contractor or to a “not for profit” organisation that has a community of interest with an existing Scheme Employer.  To enable the pension entitlements of transferring staff to be protected, these bodies will become admitted bodies. There are two types of Scheme Employer in the “admitted body” category, which are:

1. Transferee Admitted Bodies (TAB’s), representing contractors, and 
2. Community Admitted Bodies (CAB’s), representing “not for profit” organisations.

Designating Bodies: Staff employed at Town and Parish Councils are eligible to join the LGPS where the Town or Parish Council are willing to provide this benefit to its staff, having regard to the issue of staff retention and the financial implications. 

There are different considerations and processes for each type of Scheme Employer when exiting the Fund and these are addressed in turn below.

Exit triggers for Scheduled Employers

As there is a statutory entitlement for all employees of Scheduled Bodies to be members of the LGPS, an exit from the Fund is rare and usually only occurs at the instigation of Government. For example, Academy closure or Local Government reorganisation. In these instances, the Government will usually direct the termination arrangements.

Exit triggers for Admitted Bodies

An Admitted Body will usually exit from the Fund under one of two circumstances:

1. Contract End - The contract has ended, either as a result of the contract end date being reached, naturally or prematurely. 
2. No Active Members – There are no longer any active members employed by the admitted body e.g. the last member has retired or resigned.
3. Insolvency – Exit is necessitated by insolvency or corporate restructure. This type of exit is rare.

When an outsourcing contract comes to an end the outsourcing Scheme Employer may take back in house the staff who were TUPE transferred to work on the service contract. Alternatively, the outsourcing Employer may wish to re-tender the contract to a new service provider (where the outsourcing Employer is under an obligation to ensure pension protection), in which case the Fund Actuary will need to calculate a new risk assessment and employer contribution rate. If the outsourcing Employer does not wish there to be a gap between a current contract finishing and a new contract starting, the Lead Officer should ensure that Avon Pension Fund is notified in good time for potential pensions costs to be shown in the tender document. In practice, despite the obvious connection, the exit of the previous admission and the setting up of the new employer will be dealt with as two separate exercises. 

Further guidance around outsourcing a service and setting up a new admission can be found:

• Outsourcing a Service with Local Government Pension Scheme (LGPS) Eligible Employees (PDF, 299.56KB)
• Considerations when Transferring Staff (TUPE) and Outsourcing a Service

Exit triggers for Designating Bodies

Designating Bodies will in most cases exit the Fund when active membership falls to zero and, unless the Fund is advised of another member being nominated, once the active member leaves employment we would expect the Scheme Employer to exit the Fund, although there are alternatives in practice. 

An exit may also be triggered by the redrawing of Parish boundaries, as this could lead to a Parish Council being consolidated or split apart. These types of cases are dealt with on a case-by-case basis as there are additional considerations around how the exit debt is settled after exit.

An exit event has the potential to put significant financial strain on a Town or Parish Council, so the nomination of members for Designating Bodies requires careful consideration. Further guidance on these bodies joining the Fund can be found in the apply to join the LGPS section.

Exiting the Fund as a result of redundancy

Exits can sometimes be triggered unknowingly because of redundancy. This often materialises when there is a wider redundancy programme taking place at an Admitted Body with only a few eligible members. Thus, if you are considering running a redundancy programme and are an Admitted Body in the LGPS, it is vital that you consider the potential implications for ongoing participation in the APF at the same time.

As well as the potential exit debt due as a result of the termination (if there is a surplus the exit will, of course, be cost free), you may also need to consider whether there are any “Strain on the Fund” costs payable for members made redundant who are over the age of 55. 

The normal retirement age for all members of the LGPS is linked to the State Pension Age, but members aged 55 and over can elect to retire without their employer’s consent, with an actuarial reduction. However, if a member retires early due to redundancy or for reasons of efficiency, there is likely to be a Strain on the Fund because no actuarial reduction applies. Strain on the Fund costs arise when a member draws the full accrued pension prior to normal retirement age. 

Estimates for potential Strain on the Fund costs should be sought from the Fund before redundancy programmes commence as the amounts involved can be substantial and, in extreme cases, negate any potential reduction in costs.

Process for exiting the Fund

The Scheme Employer must inform the APF of any changes in the organisation which could lead to participation in the LGPS being impacted, as detailed in the Notifiable Events Framework in the Funding Strategy Statement (available on the APF Member website). This ensures that where an exit is foreseeable, the APF and the Scheme Employer can work collaboratively to ensure that the exit costs are identified as early as possible and that the financial impact on the exiting Scheme Employer is properly assessed.  

In some instances, it is not possible to pre-empt the exit as it could be the result of a change in a member’s circumstances (e.g. ill-health or death-in-service).

Once the exit has been confirmed and there are no active members remaining, the APF will request an actuarial termination valuation from the Actuary as at the date of exit which will set out the termination position for the employer. To make this request Avon Pension Fund needs the member data and cashflows to be fully up to date and correct. The termination valuation will establish the liabilities incurred in respect of benefits accrued by the exiting employer’s deferred and pensioner members, along with the exiting employers share of assets, and will provide a termination certificate setting out whether an exit payment is due to the Fund or an exit credit is payable to the employer. 

Full details of the assumptions and actuarial approaches used for termination valuations can be found in the Funding Strategy Statement. 

On receiving the termination certificate from the Actuary, the Fund will follow the LGPS Regulations and Funding Strategy Statement and make a determination as to which party is responsible for a surplus at termination. 

Settling termination deficits or surpluses

The approach to settling the residual deficit (or surplus) from exiting the Fund will vary by Scheme Employer type and will also depend on the funding position at exit. Each Employer type has been considered below to give an indication of the potential approach:

Scheduled Bodies

All Scheduled Employers are open to new members under the Regulations, so the risk of exit is very low. Where a cessation event takes place (see “Exit Triggers for Scheduled Employers”), the termination process will depend on the circumstances in that particular case. 

It should be noted that the academy sector is overseen by the Department for Education, and they have issued guidance for instances of failing academies. This is against a background where the Government has guaranteed to fund the liabilities of insolvent academies so that these liabilities do not fall to be met by the other Scheme Employers within the Fund. 

For academies in a Multi-Academy Trust the Department for Education have stipulated that: 

“When an academy closes within a multi-academy trust (MAT), the MAT (as a continuing employer) will absorb the pension liabilities, and the guarantee will not apply.” (DfE local government pension scheme guarantee for academy trusts)

In these situations, the APF will link the termination deficit to another academy within the Trust, or will continue to record the exited employer separately at each valuation to calculate any payments due for the respective valuation period. The choice of treatment will depend upon instructions from the MAT.

If the academy is not part of a MAT and is unable to settle the exit debt, the Fund would rely on the DfE guarantee. The DfE will likely be aware of this issue early in the process. 

Admitted Bodies

The approach for Admitted Bodies from exiting the Fund will depend on:

• What kind of admission body they are (Transferee Admission Body or Community Admission Body).
• In the case of a Transferee Admission Body, the clauses included within the commercial contract around pension risk sharing. 
• The termination position and whether it is a surplus of deficit.

Where pensions risk remains with the guarantor, the assets and liabilities at termination, whether there is a deficit or surplus, will revert to the guarantor and then form part of the guarantor’s position at the next actuarial valuation. Where the commercial contract specifies that the pension risk sits with the contractor (Transferee Admitted Body), the amount paid/payable is the responsibility of the exiting employer. If a deficit exists and it cannot be settled, the Fund will recover the amount from the guarantor either as a further contribution collection or as part of the next actuarial valuation. After the deficit or surplus has been settled, the assets and liabilities will be in balance and will then be subsumed by the guarantor. 

Designating Bodies

The approach to settling liabilities from Designating Bodies exiting the scheme varies considerably for each employer. Town and Parish Councils should be aware of the Fund’s policy with regard to employers exiting the Fund, set out in the Funding Strategy Statement, which explains why the cost of leaving the Fund is invariably higher than the cost of joining. A full explanation can be found in the “Town and Parish Councils guidance on joining Avon Pension Fund” document. The key points to takeaway are that:

1. Town and Parish Councils initially join the Fund fully funded (zero assets and zero liabilities). It is also fully funded if a member opts to transfer in service accrued with another local authority employer, but it should be appreciated the valuation basis will change on termination so that a deficit on the transferred in service is likely to emerge.
2. Over time, the assets and liabilities will increase but not necessarily at the same rate. The effect of changes in asset values, valuation assumptions and membership movements can have a substantial impact on the funding position.
3. When the Parish Council exits the APF the actuarial valuation at termination is assessed on the lower-risk funding basis which will increase the liabilities and in turn generate a potential exit debt (deficit). 

As there is a significant risk of an unaffordable exit debt materialising when membership is limited to a specific member and that member leaves or retires, Parish Councils are advised not to nominate any of their staff for membership of the Fund unless this is expected to be a long-term arrangement. This means that as a matter of principle the Parish Council should be committed to joining the Fund in relation to specific ongoing posts (e.g. all future parish clerks should be offered LGPS) and not limit participation to one individual who may request membership of the Fund. 

Options if termination debt is unaffordable (No Guarantor)

The default position for exit payments is that they are paid in full once the termination valuation cessation assessment has been completed by the Actuary (adjusted for interest where appropriate).

There are flexibilities around the payment of an exit debt, at the discretion of the Fund, which are summarised below:

• Debt Spreading Agreement (DSA) – the actuarial valuation report for termination is struck when the last active member leaves but the exit debt, with interest, is recovered over a fixed period of time.
• Deferred Debt Agreement (DDA) – the employer continues to participate in the Fund with no contributing members.  In effect, the employer will continue to pay contributions into the Fund, with the funding position re-assessed at each triennial valuation until the deficit is fully discharged. 

The full APF policy on the DSA and DDA can be found in the Funding Strategy Statement on the APF Member website.