LGPS Employer Contribution

bonnyrigger

I was part of a TUPE transfer to a new private sector contract that included LGPS membership in 2016, it is a completely new CARE pension with no other service. 
Employer contributions have always been huge (30% plus), until this year when it suddenly dropped to zero after the pension scheme did a review.
LGPS have confirmed all OK and my entitlements continue to build as normal.
What's annoying me is that my wife's employer pulled them all out of LGPS in 2020 due to the ever increasing employer contributions and she's ended up in a DC scheme. If they'd known this massive reduction was coming down the pipe that might not have been necessary. How can the actuarial valuation of required contribution go from 30% plus to 0% (until 2026), surely everyone's been overpaying if that's the case?

molerat

In 2020 the schemes would have needed a lot of money to guarantee the benefits. CETVs, a reflection of how much it would cost to provide your benefits, were very high and contributions needed to support that level of funding.

Now they don't need as much and CETVs are way below what they were back then, back to "normal" ranges and contributions have been cut to reflect that funding.

Unfortunately the scheme providers don't have a crystal ball and some private companies panicked at the increasing cost to their service provision and jumped ship.

bonnyrigger

It was a charity employer in her case, just a pity how it's worked out. Myself and my fellow transferees have gone from the company's most expensive "pensioners" to the cheapest overnight.

Marcon

bonnyrigger said:

It was a charity employer in her case, just a pity how it's worked out. Myself and my fellow transferees have gone from the company's most expensive "pensioners" to the cheapest overnight.

A position which could reverse at the next valuation...

AlanP_2

The employer contribution rate is also employer specific. The actuary will consider number of employees, age, number of current retirees, occupations, genders etc. to arrive at a an anticipated funding requirement.

Your employer's and your wife's are likely to have very different rates.

hyubh

bonnyrigger said:

I was part of a TUPE transfer to a new private sector contract that included LGPS membership in 2016, it is a completely new CARE pension with no other service. 
Employer contributions have always been huge (30% plus), until this year when it suddenly dropped to zero after the pension scheme did a review.

This sort of thing can happen when the number of active members has dropped below a (low) threshold. Falling to zero active members triggers an exit valuation, which determines if a final deficit payment is due. Until relatively recently a 'clean break' principle applied, i.e. this payment really was final, and the pension fund would have no recourse to asking for more money later. By the same token though, an employer falling to zero actives could not suggest they pay off any remaining liability on an ongoing basis, similar to if the employer had its own closed DB scheme.

This all meant employer rates couldn't overly allow for the fact a given admission body may have a good covenant (i.e. is financially secure), since the end point for getting money from it was determined by the number of active members, not the longevity of the company or charity itself. (Obviously in principle there might be an admission body with a weak covenant but lots of active members. Such an employer would have a big contribution rate too.)

While it may not apply to your (or your wife's) case, another factor, when the number of actives falls to a handful, is the nature of those actives. For example, a group of active members with (say) 15 years final salary membership and 20 years to normal pension age will attract a higher rate than a group with 5 years CARE membership only, given the potential for the value of final salary service to sharply increase with the final salary link. Conversely if a proportionally high number of members with final salary accrual leave early, then that would reduce the risk of the employer from the pension fund's POV.

How can the actuarial valuation of required contribution go from 30% plus to 0% (until 2026), surely everyone's been overpaying if that's the case?

DB schemes generally have seen much improved funding levels in the past few years (hence things like the USS benefit change reverse, lots more buy in and buy out talk with closed private sector schemes, etc.). In addition, LGPS regulations were changed a few years ago to allow a more flexible approach on an employer falling to zero actives (subject to local agreement). That said, generally improved funding levels will likely be the main reason, in the context of prudent employer rates previously.