4 December 2017
The Local Government Pension Scheme (LGPS) has members not just from the education sector, but also local government, the police force, voluntary organisations, amongst others. For academy schools the value of the liability reported within their financial statements runs into the hundreds of thousands, if not millions of pounds in the majority of cases.
UHY offices often receive questions from schools pre and post-conversion regarding the LGPS as it is a perceived area of concern as the value of the net liability is so significant.
Some of the most common questions we receive, and our responses, are listed as follows:
Will our school be able to afford to pay LGPS pension contributions when it converts to an academy?
Your school is already paying LGPS pension contributions as a non-academy.
Are the LGPS employer contributions rates higher than Teachers' Pension Scheme (TPS) employer rates?
In most instances the LGPS employer contribution rates are similar to TPS employer contribution rates of 16.48%, including the 0.08% administration levy.
Will LGPS contributions increase significantly if we become an academy?
This has been the case in the past, but changed in 2013 when Michael Gove MP, Secretary of State for Education at the time, confirmed the department will meet any pension liabilities should an academy close. Prior to that, academies were seen as higher risk without the financial backing of the local authority.
LGPS contributions are set every three years by Local Pension Fund Boards. The latest valuation was 2016/17. The LGPS contributions should not be any different to those paid as a non-academy school.
Note that we are expecting TPS rates to increase from April 2019 to between 18-20%.
Will our school inherit a large LGPS deficit but not a TPS deficit when it converts to an academy?
Both TPS and LGPS funds are in deficit. The TPS deficit cannot be transferred to academies, as it cannot be identified at an individual academy level, but the deficit is significantly higher than the LGPS deficit.
Why have you adjusted our accounts for a LGPS operating charge? Will the academy need to pay this charge over-and-above the employer contributions paid over?
Accounting standard requires the LGPS liability to be calculated using actuarial assumptions. This liability is recorded as a provision in the academy’s financial statements as the assumption is that the liability will need to be settled in the future.
The additional I&E charge recorded in your financial statements does not mean you need to pay this over. It is to reflect the actuarial assumptions underpinning the liability provision as required by accounting standards.
In summary, the operating charge will not have an adverse impact on your cash position; and is included in the restricted pension reserve, which we tend not to consider when looking at the ’bottom-line’ position of the academy.
Why does the LGPS liability in our accounts change so significantly year-on-year?
You will receive an annual actuarial report which confirms the net liability based on changes to the value of assets, obligations, contributions paid and other assumptions. These assumptions include financial assumptions (eg. discount rate), mortality rates and commutation. Financial assumptions are based on market conditions at the end of your financial period, which can lead to some volatility in the net liability valuation.
Who decides on the assumptions used in the calculation of the net liability?
The actuary will provide a report detailing the assumptions used. It is up to the academy whether or not to accept these assumptions, but the vast majority do.
Will the academy’s contributions increase or decrease in-line with the balance sheet liability?
The balance sheet liability is set based on the annual actuarial report in-line with accounting standards. This is not used to calculate LGPS employer contributions. LGPS contributions are set every three years by Local Pension Fund Boards and the latest valuation was 2016/17.
Will the trustees be liable for the LGPS net liability should the academy close?
The department has guaranteed that any outstanding LGPS liabilities on the closure of an academy will be met by the department.
If you would like to discuss your funding issues, please contact your local UHY academy expert or fill in our contact form here.
