A sting in the tail for new academies

This Bill will make all failing schools convert to academies, giving rise to a tidal wave of up to 1,000 conversions according to the Government’s own press announcement on 3 June.

What issues could this create?

All proposed academies will need to take legal advice in relation to the employer contribution rate they will be required to pay into the Local Government Pension Scheme (LGPS).

A recent decision of the Deputy Pension Ombudsman (DPO), reference PO-2665, sets out reasons why a LGPS administering authority was justified in imposing a 43.4% employer rate – yes, you read that right.

Could this happen to forthcoming academies?

In this particular case, the academy argued it was being charged for deferred or pensioner members it had never employed, which was unreasonable and hence unlawful for an authority to do. As a new legal entity it should not be burdened with liabilities attached to the previous legal entity.

That is a reasonable argument, but the DPO found that the academy was not being charged for such liabilities. The employer rate applied only to the active members and was therefore wholly justified. The reason for the high employer rate lay not in the liabilities, but in the allocation of LGPS assets to the academy.

The administering authority argued that it had acted entirely within its rights. The DPO agreed, as the asset allocation for new employers within the LGPS is not governed by regulations, but is entirely a matter of policy and professional actuarial advice. The DPO set out the authority’s justification for its policy, which is interesting in the context of the predicted 1,000 new academies.

How did the authority justify the high rate?

The authority argued that as a result of the academy’s conversion, education funds were diverted from its coffers to those of the academy. The authority had been relying on those funds to pay off LGPS liabilities over time, including pensioner and deferred members who had been employed in the past by the school before it became an academy.

Deprived of the future funding, the authority made a policy decision to retain enough assets nominally earmarked for past and present employees of school to fully fund the pensioners and deferred members it remained liable for, and only handed over to the academy’s nominal fund the remainder of the assets to be applied to the active members.

In other words, rather than dumping excess liabilities on the academy (as the academy believed to be the case) the authority held back more assets than the academy expected, making the academy much more underfunded in relation to the active members than it would have been if priority has not been given to the pensioners and deferred members.

The LGPS is not a trust like a private sector final salary scheme. For the latter it would arguably have been unlawful for the trustees of a final salary scheme to prioritise the interests of two classes of member (pensioners and deferreds) over another (actives), but trust law considerations do not come into play here, and the DPO did not consider anything but the statutory rules of the LGPS.

Could this be repeated at all new academies?

Local authorities are strapped for cash, and they will protest if numerous academy conversions remove future funding streams they were relying on to pay off their historical pension liabilities.

There is nothing to stop similar policy decisions to prioritise assets. The DPO noted that the academy had requested assistance from the Department for Communities and Local Government (DCLG) and the Department for Education (DFE) in its dispute with the authority.

Despite the much-vaunted Ministerial statements that academies should not pay unjustifiably higher employer pension contributions to the LGPS compared to maintained schools in the area, it would appear the DCLG and the DFE were unable to do anything to help. This is probably because the higher rate was indeed justified by the asset allocation policy discussed above.

Looking to the future, academies should note that the asset allocation policy will not only affect employer contribution rates but also the potential exit charge (an up-front payment of the deficit) should an academy cease to be a participating employer. This can happen if it folds, but also if it joins a multi-academy trust.

So it would appear that there could be some unpleasant surprises ahead, especially if failing schools are forced to become academies under the Bill. Hopefully, this issue will be addressed before the Bill becomes an Act.

What should candidate academies do?

To start with, they should put pension costs at the forefront of their negotiations. The academy in the situation above did not do so, and only protested after it had to pay the 43.4% contributions it knew about before conversion. This did not help its case.

How can Ward Hadaway help?

Our experienced academy conversion specialists, together with our pensions experts, are able to help candidate academies assess the viability of future conversion projects.

We can help conduct negotiations concerning employer contribution rates before conversion.

Please do not hesitate to contact Tristan Mander for further information.