Evaluating exit opportunities for housing associations in the Local Government Pension Scheme
For housing associations considering the possibility of exiting the Local Government Pension Scheme (LGPS), now could be a good time to investigate further, writes Kim Jones.
Historically, housing associations with membership of defined benefit pension schemes such as the Social Housing Pension Scheme (SHPS) and the LGPS have largely been hostages to fortune — faced with spiralling pension costs driven by seemingly insurmountable funding deficits. However, the prospects for those in the LGPS now looks somewhat brighter.
Here, I explore recent improvements to the LGPS funding level, upcoming developments and practical guidance for housing associations considering exiting the scheme.
Understanding LGPS pension costs
Many housing associations began participating in the LGPS as a consequence of outsourcing arrangements and following TUPE transfers of employees with rights to join or remain members of the LGPS.
While these pension obligations have often been viewed as the cost of doing business, the true costs (and associated obligations) of participation in the LGPS are often underestimated (including so-called ‘strain’ costs, arising for example on redundancy). Housing associations — which generally face uncertain income streams — have unsurprisingly been weighing the cost/benefit of defined benefit pension provision and where possible, exploring the feasibility of exiting the LGPS.
Improvements to the LGPS funding level
In 2024, there was widespread media attention when it was revealed that the aggregate funding level for the LGPS had increased from 110% to 112%, reaching a record high surplus of around £45bn as of June 2024. As a result, many employers within the LGPS saw their funding deficits significantly reduce and in some cases, become surpluses. The triennial valuation for the LGPS takes place in 2025, with initial valuation results expected to be received by employers around October 2025 before the full results are announced in early 2026 and new contributions rates come into force from April 2026.
Exploring exit — possibility of exit credits
Where an employer exits the LGPS and the required cessation valuation records a surplus, there is the possibility (albeit at the discretion of the administering authority) of an exit credit being paid i.e. a share of the surplus being paid to the employer. The likelihood of an exit credit being paid will depend on a number of different factors including whether the exiting employer was exposed to the principal pension risks (the risk of increased contributions and of being required to meet any deficit on exit) over the course of its participation or whether these risks were passed back to the local authority by entering into risk sharing arrangements, including ‘pass-through’ arrangements.
Practical steps for housing associations seeking exit
We recommend that housing associations looking to exit the LGPS refresh their understanding of the current funding position (including by contacting their LGPS fund) in order to understand whether any exit credit might be payable. While any funding position would be reassessed at exit as part of the cessation valuation process, even an estimated funding position is likely to provide a reasonable indication as to the possible outcome on exiting the LGPS. It would also be sensible to review the terms of any commercial contract and of any related admission agreement (which generally document any agreed risk-sharing arrangements) to assess the likelihood of an exit credit being payable.
