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Coping with rising employer numbers

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The number of employers paying into the Local Government Pension Scheme (LGPS) is rising – and fast.

According to figures supplied by the LGPS advisory board, the number of contributing employers rose by 14% between March 2013 and March 2014 from 9,340 to 10,671. The consultancy Hymans Robertson estimates the number has doubled in the last decade, and some funds are reporting a similar inflation in employer contributors over just three years.

The LGPS allows many different kinds of employers to make provision within it for their employees’ retirement. Authorities administering the schemes are well used to the contributions of second-tier authorities, non-teaching local authority-maintained school staff, and third sector organisations.

Nigel Cook, head of pensions and treasury at Croydon LBC

Nigel Cook

The significant rises in employers joining the scheme over the past few years are, however, also increasing the administrative burden on officers running the funds. In some cases, these new entrants have introduced a tension within the scheme as employers are being set different levels of contributions

The average number of employers per fund varies significantly and according to the type of administering authority in charge. Metropolitan and county council-run funds have on average 290 and 181 employers respectively. Welsh council-run funds have just 47 employers on average, while London borough-run funds had 31 on average.

 

Academies and outsourcing

A chief reason for the sudden increase in employers is the rise of academies for two main reasons: since 2010, council-maintained schools became eligible to convert to academy status and a requirement for sponsored academies to have a curriculum specialism was removed.

These changes had a profound effect: the number of sponsored academies in England shot up from 203 in May 2010 to 629 in April 2011. By July 2015, the numbers had hit 4,271.

Such an increase has swelled significantly the numbers of employers within the LGPS. In some areas, the rise has been acute.

Nigel Cook, head of pensions and treasury at Croydon LBC (pictured), says the fund had acquired around 50 extra employers since 2010. Over the same period, the Greater Manchester Pension Fund’s number of employers has increased from 235 to 450. Some 150 of that total are academies. The number of employers in the Warwickshire pension fund has increased from 68 in 2009-10 to 128 in 2013-14.

Croydon’s Mr Cook expects the trend upwards to continue: “Over the last five or six years [the number of employers] has grown like Topsy,” he says.

“The biggest increase is the academies and the stuff about ‘coasting schools’ [education secretary Nicky Morgan’s plans to make ‘complacent’ schools into academies] will only accelerate this. I expect all senior schools and most junior schools will become academies.”

Mr Cook adds that new delivery models at local authorities, such as outsourcing and the creation of mutuals and trading companies had added to the roster of employers within the LGPS. In terms of number of employers, the growth of academies was the main contributor, he says. 

Neil Buxton, pension services manager at Warwickshire CC, agrees with Mr Cook about academies driving up employer numbers: “The increase in the number of academies has seen the largest increase of employers. 

“At the 2010 valuation, the Warwickshire fund had a little over 50 active employers, increasing to around 88 in 2013. Of this increase, 25 were academies.  At the 2016 valuation, the fund is expecting to have over 160 employers, 70 of which will be academies.”

He added: “We have also seen an increase in the number contractors dealing with small catering contracts for local education authority schools and we are expecting this to increase with Fair Deal applying to academies.

“There has also been an increase in the number of small parish and town Councils applying to join the fund.”

 

Administrative challenges

The rising numbers of employers within schemes has created fresh problems for administering authorities to solve.

While non-teaching school staff at local authority-maintained schools are already able to join LGPS, when schools becomes academies they become scheme employers in their own right.

These academies are then treated as separate organisations and are expected to pay contribution rates based on their own stability as an organisation instead of being treated as part of a local authority.

Contribution rates themselves have proved contentious.

Some schools converting to academies in the last parliament found themselves suddenly liable for almost twice the contributions they paid before they switched.

Once free from local authority control, an academy’s employer covenant – its ability to fund the pension scheme – can look significantly weaker in the eyes of scheme actuaries.

This problem of increased contributions for academies came to a head in July 2013, when some complained that administering authorities had set contributions based on paying down their share of the scheme deficit in just seven years.

While in line with the academy’s funding cycle, this issue prompted the then-education secretary Michael Gove to step in.

In a ministerial statement in 2013, he pledged that the government would guarantee the deficit of any academy that collapsed (with a number of caveats).

As a result, many LGPS employers widened the deficit repayment periods of their academies – but not as much as the academies might like.  

Mr Cook said an attempted to apply the same contribution rate to all its academies had been contested. The fund run by his authority has now agreed a compromise that is “something in between the seven-year and [standard] 22-year deficit reduction plan”.

Mr Cook adds that this change has a knock-on effect for implementing automatic enrolment in pension schemes. “Academies must auto-enrol all their staff at the point of becoming an academy, whereas other schools stage [begin auto-enrolling their staff] at the same time as the rest of the local authority.”

Peter Morris, director of pensions at Tameside MBC, which runs the Greater Manchester Pension Fund, says the increase in employer numbers is adding to administering authorities’ workload.

He says there has been an increase in processing admission agreements, for which new employers apply for membership of the scheme (this does not apply to academies), contribution monitoring and employer training events.

Mr Morris says that bringing in new employers also gradually makes the scheme less mature, which will have an impact on funding strategy.

Mr Buxton agrees: “The increase in the number of employers places an additional strain on the administration of the fund in a number of ways. 

“There is an increase in communications and training in the administration requirements of the fund, both at the outset of the employer joining the fund and on-going, to ensure the correct contributions are paid and accounted for.”

 

Working with employers

Mr Morris says that very large employers, such as outsourcing companies, are often well-versed in participating in the LGPS and do not need a great deal of support in understanding their responsibilities.

The opposite is often true with academies and other new players, he added.

Mr Cook agrees: “Big outsourcers tend to know how it goes, but new mutuals etc have a level of inexperience and need hand-holding, so that is resource-hungry.

“The problem is developing relationships with these new parties – we need enough people in the team to keep up with them.”

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