Posts by David

David Davison

David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers
David Davison

Finally at the end of February 2020 the results were published on the consultation on LGPS Reform for England & Wales, which ended 31 July 2019, and it’s a bit of a mixed bag.

Valuation Cycle

It is proposed to move the local fund valuation cycle from 3 years to 4 years to link with the Government scheme valuation. With this change it is proposed to provide funds with the power to undertake interim valuation and a widening of the power to amend employers’ contribution rates. What unfortunately has not been proposed is a strengthening of the communication requirements on Funds to ensure that admitted bodies are aware of their funding position more regularly over this lengthened period.

Dealing with ‘Tier 3’ employers

In terms of seeking to help funds provide additional options for employers looking to exit the response states “Current regulations require that when the last active member of an employer leaves the scheme, the employer must pay a lump sum exit payment calculated on a full buy-out basis.” This is fundamentally incorrect and is a misunderstanding also commonly held by LGPS Funds. Regulation 64 specifies that Funds must obtain “an actuarial valuation at the exit date”. It neither specifies that this must be done on a buy-out basis, or even that when carried out that it has to be enforced. It is the Funds, and their actuarial advisers, who chose to enforce this exit on a buy-out type basis but it is not actually stipulated.

The response makes the proposal “to introduce ‘deferred employer’ status that would allow funds to defer the triggering of an exit payment for certain employers who have a sufficiently strong covenant. Whilst this arrangement remains in place, deferred employers would continue to pay contributions to the fund on an on-going basis.” Whilst at a high level the proposal is welcome it is deficient in a number of key areas:-

  • As part of our response to the consultation we highlighted specific experience of the introduction of similar provisions in Scottish LGPS in 2018. The revised Regulations were effectively ignored by Funds and has resulted in SPPA having to issue further consultation to see how the changes could be better implemented. The proposals made effectively replicate the Scottish wording without making any attempt to look to learn from their adverse experience.
  • Helpfully the response does recognise that “some smaller and less financially robust employers are finding the current exit payment in LGPS onerous” and that “rather than protecting the interests of members, it may mean employers continue to accrue liabilities that they cannot afford.” It can also mean they are “driven out of business.” This is certainly becoming a much more common occurrence and is likely to continue apace over months and years as admission bodies closed to new entrants gradually reach a point where they have no active members.

However, worryingly, the response then does not specifically deal with this referring to employers with a “sufficiently strong covenant”. How would this be defined? What would happen for those employers who do not meet this classification? The response wholly ignores that employers with a weak covenant only option is to continue to accrue further liabilities without a solution which is neither in their interests, the Fund as a whole and other employers in the Fund.

There continues to be no recognition of the risk of future accrual and the strain that puts on Funds and other employers and that there needs to be compromise for weaker covenants to reach an amicable solution.

  • There is a proposal that consideration is given to whether a maximum funding time limit of perhaps 3 years is considered. This is frankly ridiculous as the vast majority would struggle to pay cessation debts over even a 10 year term and much longer repayment terms need to be considered. For example, in Scotland, Strathclyde Pension Fund and Lothian Pension Fund are considering terms of up to 20 years. I would be interested to know what specific research has been carried out to consider if 3 years is affordable? None I suspect.
  • There is little recognition that S75 deferred status being used (or more rather not being used) in private sector multi-employer schemes is very different to what is likely to be needed on LGPS schemes as the background is completely different. The overall covenant for LGPS schemes is much stronger as more employers have public sector backing and the distribution of liabilities much more widely distributed with small charities representing a tiny fraction of overall liabilities and therefore small changes in deficit amounts making a negligible impact on the overall Fund value at risk. Most importantly also it is much less likely that LGPS will ever close to future accrual so being able to fund over a long period of time is much more palatable.
  • The issue of legacy liabilities which has seen admission bodies assume material amounts of historic benefits for ex public sector staff has been completely ignored.
  • The seemingly endless round of consultation on ‘Tier 3’ employers looks to continue as the SAB have commissioned AON to look at funding, legal and administrative issues. Surely after all this time there can’t be key individuals within Funds who don’t understand the issues and options. But no, lets rehash them all again with a view to the SAB making some recommendations to the Secretary of State later in the year.  A bit more fiddling while Rome burns!

Thankfully there are signs that some Funds are adopting a more pro-active approach even ahead of Regulatory change recognising that they need to do so in order to better deal with the issues. Unfortunately not all are quite so enlightened, choosing to wait for ‘chapter & verse’ when the consultation already confirms that the Ministry is not intending “to legislate for every aspect” but to provide a more flexible framework lead by Funds.

I can only hope we’re finally nearing the end of the ‘consultation’ and will soon move into something that looks more like implementation as demand is already high and only likely to increase.

David Davison

With most charities in LGPS having to disclose their pension funding position in their accounts at 31 March 2020, the recent turmoil in the markets is likely to be causing concern, particularly for those with limited balance sheet surplus. 

The FTSE 100 has fallen by over 30% since March 2019. While this does not directly reflect the impact on individual funds it is a good proxy for the change in growth assets over the year.

A ‘flight to safety’ will have increased the value of government bonds.  However, a widening of credit spreads will have reduced the value of corporate bonds. 

Overall, depending on the investment strategy employed by the fund, asset values may be down with Funds with very little hedging likely to see a significant fall in asset values.

The deficit recorded in your accounts also depends on the value placed on your liabilities, and at the moment there is some good news on that front.  Widening credit spreads have increased corporate bond yields and they are now higher than they were in March 2019.  Inflation has also fallen.  Both of these factors will reduce the value places on liabilities.

At time of writing therefore charities may see an improvement in their position in comparison to last year.  The position is highly volatile however and Is changing significantly every day.

If you are concerned about the figure likely to be placed on your balance sheet there are steps you can take to help manage this.

What is not universally known is that it is the Directors /Charity Trustees who have responsibility for setting the FRS disclosure assumptions and not the Fund actuary.  You can therefore chose to use a different set of assumptions if those are more suitable for you and bearing in mind that one set of global assumptions issued by the Fund actuary can’t be specific to each employer, this is probably something worth considering, especially if your balance sheet position is important.

You may well be surprised by just how much of a difference small changes in the assumptions can make to your liabilities and therefore your deficit and balance sheet position.

I would therefore encourage employers already disclosing an LGPS pension liability to consider the assumptions used and whether or not they are appropriate.

The table below shows the potential impact of varying the assumptions used to calculate the FRS 102 liability.  Please note this will vary for each scheme and the figures below are provided as an example only (based on a scheme with a duration of approximately 20 years).

Change in assumption Change in liability
+0.1% p.a. discount rate -2%
-0.1% p.a. inflation -2%
-0.5% p.a. salary increases -1%


Indicative results showing the impact on deficit and balance sheet position based on the above changes to the assumptions are shown below.

‘Standard’ assumptions £000 Organisation specific assumptions £000
Assets 2,000 2,000
Liabilities 3,000 2,850
Deficit 1,000 850


So, for this illustrative example, a change of around 5% in the liabilities as in this case could reduce the deficit by around 18% and improve the balance sheet position by £150,000.

Therefore, you can see that for organisations participating in LGPS, it is well worth considering the use of bespoke assumptions, particularly if you are looking to manage your balance sheet. If you would like an indication of how changes could have impacted your 2019 disclosures, please let me know and we would be happy to provide these.

If you are looking to incorporate non standard assumptions, you need to consider this now as Funds usually require some advance notice that a different process will be used. We provide this service for many of our clients so don’t hesitate to contact us if you need more information.

David Davison

In mid 2018 the LGPS (Scotland) Regulations were amended (as outlined in Bulletin 21 – Hope Springs Eternal to introduce the concept of a suspension of the cessation debt when an employer exits a Fund. This brought a welcome and much needed option to assist admission bodies, many of whom are charities, in better managing their LGPS liabilities.

Unfortunately to date Funds have chosen not to utilise this additional flexibility through the adoption of alternative solutions in some cases but primarily by choosing to just ignore the change and carry on as previously.

In January SPPA issued a consultation to identify who had used the new provisions and how often, and to consider what changes might be needed to Regulation to have Funds more frequently utilise them. It also asked for suggestions about what other measures could be considered to add additional flexibility to the exit process.

Here is a link to our submission which looks to make some practical proposals how a more consistent, equitable and flexible approach could be adopted. We would hope to engage further with SPPA and the Funds to provide any additional support necessary to reach mutually beneficial solutions.

David Davison

Employers in England, Wales and Northern Ireland LGPS will be bracing themselves for the results of the March 2019 actuarial valuations which should be landing in the inbox shortly (Scottish employers have another year to wait). So, what are they likely to see?

Asset returns have been positive over the period which will have a positive impact on the funding level, all other things being equal. Inflation is also broadly unchanged over the period. There was some optimism around mortality rates although an announcement of a fall in deaths in 2019 has potentially put something of a damper on that.

However, that’s likely to be all the good news. Gilt yields have continued to fall from just below 2.3% in 2016 to around 1.6% in 2019 placing a higher value on liabilities. Gilt yields have continued to fall subsequently with yields down around the 1.0% level now.

The big issues likely to make an impact are likely to be legislative ones. These valuations will see the incorporation of additional liabilities related to GMP equalisation. In July we also witnessed the Government being defeated in the McCloud case with speculation this could cost Funds billions of pounds. The case found that the Government had forced younger members of the Judges and Firefighters schemes to join less valuable schemes while older colleagues were protected by transitional arrangements providing them with valuable additional benefits. The Government was not granted leave to appeal so steps will now have to be taken to rectify the problem. The LGPS has similar transitional protections.

These issues will likely increase liabilities and therefore funding costs.

The uncertainty created is also likely to hit exiting employers and will result in uncertainty around the impact for employers providing out-sourced services who may be left ‘holding the baby’.

Many schemes had been going through a cost cap review which suggested they may have to increase the level of benefits being provided (as there was a cost surplus), however these deliberations were deferred awaiting the impact of these changes.

Employers may have to brace themselves for further cost increases with no real viable route to escape. Hopefully the LGPS England & Wales Consultation will look at offering some additional flexibilities and a more equitable exit basis. Fingers crossed.

David Davison

In my last Bulletin I provided some detail on why the current exit basis used by LGPS funds is based upon excessive prudence and is totally inequitable to exiting charities costing them £100’s of millions in excess exit payments, swelling Fund assets and reducing Council costs.

The approach is unfortunately also counter-productive as it locks charities in schemes by presenting them with unaffordable exit payments thereby increasing risk for other participants in the Scheme. Funds focus on the risk of default and don’t really assess the material risk of future accrual, particularly for organisations with a weak covenant. It could be argued that the greater risk lies with an employer continuing to accrue further liabilities, which they may be unable to afford, which places other employers at risk.

The cessation lottery

Below is a table showing gilt yields and inflation over the last 12 years.

It can be seen from this that yields were broadly above 4% until around 2011 when we began to witness a steady decline to current levels where they are at or below 2%. There has been some volatility in the inflation position though not to the same extent as with gilt yields. Lower gilt yields will be resulting in very materially higher cessation debts being required from exiting employers which often makes them unaffordable.

Cessation debts could have been 2 to 3 times the size depending upon when the cessation debt was calculated. As an example we recently witnessed a debt move by around 50% over a matter of months and because of where the assets were held the employer had no control over the figure during the period when they were awaiting cessation numbers from the Fund Actuary.

Taking cessation payments based on gilt yields may make some theoretical sense where liabilities in Funds are being secured by the purchase of broadly matching gilts. However, very few Funds do this and we would question if that is sensible and a good use of public monies given the longer term view that Funds can adopt, the relatively small proportion of overall liabilities these Funds are likely to represent as well as the potential returns which could be foregone. This would be particularly the case where small exiting employers had very young staff where a 100% gilts-based investment would be wholly inappropriate.

The vast majority of Funds take these cessation payments and continue to fully invest them in their standard growth portfolio meaning the Fund continues to take the investment risk, and indeed return, as demonstrated in my previous article.

Alternative solutions

A number of alternatives exist which could provide for a fairer distribution of risk on exit.

The PWC Report referred to in my previous article suggested the use of Liability Driven Investments which could increase the ‘secure’ discount rate which could be used, thereby reducing exit payments and making exit more affordable.

The cessation basis could also reflect the likely duration of the liabilities with a moving discount rate applied depending upon the likely term the assets will be held. This basis could also be adjusted depending upon the level of any security which could be provided.

We would urge the Ministry of Housing, Communities and Local Government and LGPS to consider these alternative solutions to look to achieve a more equitable distribution of risk and reward.

David Davison

I have long been of the view that the current basis of assessing payments for charities when they exit an LGPS is excessive and doesn’t provide a fair balance between the schemes and the charities. Indeed I’m not the only one to hold this view.

In 2015 the Scheme Advisory Board in England & Wales commissioned research from PWC on this specific issue which commented:-

“We recommend that Funds should not be permitted to use very onerous assumptions for exit bases. One way to achieve this would be to require that the discount rate applied should not be stronger than CPI plus 1.0% or plus 1.5%. This would be the maximum strength exit basis. The range suggested is consistent with cautious investment policies but not zero risk investment policies.”

Needless to say this view represented ‘an inconvenient truth’ for LGPS Funds so the recommendation was just completely ignored. Its likely that this approach may have needlessly cost the UK’s charity sector many £100’s of millions. So just how much have Funds, and indeed their sponsoring local authorities, benefitted from these payments?

If we use a simple example comparing returns and gilt yields to highlight the issue (i.e. at this stage we are assuming all other factors remain constant). We have cessation assets and liabilities of £1m at outset with estimated on-going liabilities of £670,000 based on a 67% cessation funding rate. Table 1 shows the potential return based upon a gilts-based discount rate of 1.7% and returns of 0.5%, 1.0% and 2.0% above gilt yield (the latter reflecting broadly the on-going funding assumption).

The table shows that a matching gilts-based liability would have increased to £1.4m after 20 years and £1.66m after 30 years. Over 20 years the equivalent asset value covering this at 0.5%, 1.0% and 2.0% above gilts would be £1.55m, £1.70m and £2.07m respectively. So effectively the Fund (i.e. other active employers – primarily the Council) would have benefitted from the cessation payment by anywhere between £150,000 (11%) to £670,000 (48%) over this period based on these assumptions.

The equivalent ‘on-going’ liability reflecting a 2% return above gilts would have been around £670,000 so the exiting employer would have been paying a cessation ‘premium’ of £330,000. Allowing for a discount rate of 1.0% and 0.5% above gilts this cessation payment would reduce by £180,000 and £90,000 respectively while still providing a reasonable security margin for the Fund.

However, the position is in reality much worse than the example as the actual returns achieved by the Funds over the last decade or so have been hugely in excess of those assumed. If we consider an employer exiting in 2008 using the actual average return disclosed in the LGPS SAB Annual Reports across all Funds (net of charges) and the actual prevailing gilt yields the picture is alarming.

Based upon the £1m starting point the actual return from April 2007 to March 2018 was 87.7% (average 7.97% p.a.) and the gilts return over the same period was 35.75% (average 3.25% p.a.). This means that the actual gilt value of the £1m liability would now be around £1.42m however the actual value of the assets would be nearly £2.3m. So the Fund will have made nearly £900,000 excess return over gilts on the £1m of assets over only 11 years and around £1.3m in total. Even with no cessation payment the assumed on-going asset value (£670,000) would by 2018 be in excess of £1.5m and therefore over the gilts-based value and well in excess of a likely ‘on-going’ value which would be around £1.2m.

Funds are therefore collecting huge and, in our view, unreasonable payments on exit well in excess of the amount of money actually needed to provide the benefits. We do not question the need for some form of prudence margin to be applicable for exiting employers but Funds are demonstrating excessive prudence and refusing to consider change because they have the power not to do so. It is not unreasonable to assume that Funds could easily have taken £100’s of millions in cessation debts from the charitable sector over the last decade or so and benefitted by additional multiples of that figure. Is it reasonable for public bodies to effectively ask our charitable organisations to cross subsidise their costs to that extent?

We are firmly of the view that the existing approach is flawed and in need of revision and we made some proposals how this could be addressed in our submission to the Consultation on LGPS in England & Wales though would be less than confident that the turkeys will vote for Christmas!

David Davison

A question in the recent policy consultation “Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk” asking if schemes needed greater protections from admitted bodies, and some recent communication with a Fund, really highlighted a misconception held by Funds and those associated with them.

A constant frustration for me, and something which must be a huge irritation for charities participating in LGPS is to be accused by Funds of recklessly building up liabilities they can’t afford and then complaining about having to deal with them. This is a blatant distortion of the facts and admitted bodies would in my view have every right to feel aggrieved by the assertion. I’d just like to set out some facts so that if this assertion does rear its ugly head it can be swiftly returned to whence it came.

  • Most organisations participating in LGPS were encouraged to do so by Councils and Funds without being provided with any risk warnings about their participation. Charities therefore joined with the best of motives but often unaware of the future risks they’d be exposed to. Had these warnings been provided in a clear way I’m sure many Trustee Boards would have taken a decision not to participate.
  • Even today warnings are far from transparent and the key driver for organisations not participating is that they are not permitted to join without Government or Council protection.  Most Funding Strategy Statements outline the process for achieving this for potential participants however Funds have taken no steps to rectify the legacy position.
  • In a similar vein Funds have been happy to transfer liabilities built up by these public bodies to organisations without their knowledge, without any choice and on a basis which leaves the charity with a liability many times that of the public body. The inequity is enshrined in Regulation and Councils in my experience use it as an excuse to avoid dealing with liabilities accrued on their watch.  Should Funds not be looking to protect members interests to the maximum extent possible. Surely a public sector guarantee over historic liabilities does this?  Yet Funds have been reluctant to pursue this with conflicts of interest to the fore. Indeed from what I’ve seen Funds and government bodies have looked instead to seek every route possible to avoid their obligations.
  • Crucially then Regulation limits organisations ability to deal with the issue. While other UK DB schemes will allow employers to close to future accrual and continue to fund on an ‘on-going’ funding basis to manage down risk in LGPS Funds unilaterally trigger a cessation debt on a gilts basis. There is the constant insistence that this is the correct basis to value these liabilities even though that is not the way Fund themselves invest their assets or indeed usually the way assets are invested post a cessation. Councils are effectively using exiting charitable bodies to cross subsidise their funding. Even where professional advice has been provided to the Scheme Advisory Board recommending change this has been strategically ignored.
  • Even where some flexibility is offered this is on the repayment term, not on the closure basis. In addition Funds are using the negotiation around an exit to leverage additional security or extort higher contributions.
  • Funds usually have a one dimensional view of risk driven by what happens when an admitted body looks to exit the Fund. They are not however balancing this with the risk they are exposing participants to by allowing further accrual, particularly for those with weaker covenants. Funds are not assessing this risk to properly identify the overall position and better manage it.

Based on the above I think charities would have every right to question who needs protection from who?

David Davison

In a previous LGPS Bulletin I highlighted the consultation issued on the 8th May entitled “Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk.” The consultation closes on the 31 July 2019 and a copy of our detailed response to the specific questions can be found here or click on the image below.

Our response highlights concerns over the quality of information provided by schemes, deficiencies with the proposals and existing Regulation, the calculation of cessation debts, the drive for security, legacy liabilities and the status of public bodies in the schemes, and makes proposals for a more equitable future framework.

Over the coming Bulletins I will be examining many of these issues in more detail.

PLEASE NOTE: Our response was updated on 12th August 2019 to include additional information.

David Davison

This article was originally published in Lexis Nexis on 4th April 2019

Pensions analysis: David Davison, director and owner of Spence & Partners who leads the public sector, charities and not-for-profit practice and heads a team advising third sector bodies on all aspects of pension provision, discusses the recent government consultation which intends to ensure that exit payments paid to public sector employees are ‘value for money for the taxpayer’.

Original news

HM Treasury opens consultation on restricting exit payments for public sector workers, LNB News 10/04/2019 90

HM Treasury has opened a consultation outlining how the government will introduce a £95,000 cap on exit payments for public sector workers. The policy will see UK civil service, local government, police forces, schools and the NHS taking part in the first stage of implementation. The consultation sets out proposed draft regulations, schedule to the regulations, accompanying guidance and directions. The deadline for responses is 11:59pm on 3 July 2019.

What is the background to HM Treasury’s consultation on draft regulations restricting exit payments in the public sector published on 10 April 2019?

There has been government concern for some time about the level of severance packages in the public sector. This issue dates back to May 2015, with the government announcing it would bring forward proposals to end six figure pay-outs, then running an initial consultation with proposals in February 2016 and implementing changes in the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) and amending in the Enterprise Act 2016.

SBEEA 2015 required secondary legislation which had a first reading in the House of Commons in September 2017, with them now consulting on the detail based upon the proposals issued on 10 April 2019. It’s been pretty slow progress, but I suppose no-one should be that surprised by the contents. When this was looked at initially, there seemed to be some high profile severances and a real concern about senior staff in the public service exiting for large severances and then returning to another similar job a short time later.

The proposals follow research they’d carried out which suggested that more than 1,600 highly paid workers received payments of more than £100,000 in 2016/17 costing a total of £198m. They estimate that the total cost of exit payments across the public sector in 2016/17 were £1.2bn. So, the proposed limit will impact less than 17% of total payments and any saving likely to be materially less than that as still some pay-out will be made. The focus is going to be very much limiting large payments at the top-end and not those for the vast majority.

What are the key proposals for change and why are they being implemented now? Are there any specific exclusions or exemptions under the proposals?

The proposals would implement a cap on the value of redundancy lump sums and pension top-up payments to £95,000 in total. Those organisations impacted are specified in the proposals, but it is the ultimate aim that the legislation will apply to all public sector employers at a future date so effectively we have a two-stage roll-out.

Payments made by devolved authorities are exempt, as are payments from secret intelligence service, the security service, the government communications HQ and the armed forces given their unique requirements. Payments from fire and rescue authorities are also proposed to be exempt as they do not increase the actuarial value of the pension payable.

As a general rule, accrued pension entitlements are exempt as they do not incur an additional cost to the public purse however payments which do involve an additional employer cost (such as ‘strain costs’ payable on redundancy) would be included. Other exemptions include death-in-service benefits, incapacity benefits, a payment in lieu of contractual leave not taken, payment in lieu of notice or any payment made by court order or a tribunal.

The proposals provide a standard legal underpin, however they do not prevent employers from applying alternatives.

How would the introduction of the proposals impact on public sector employees and employers?

It is the employer’s responsibility to ensure that a payment is not made in excess of the cap. This will place an additional administrative burden on employers. Clearly for employers it would reduce the overall cost of severance packages. It is also likely to make planning for these costs more certain. For employers there will be a requirement to consolidate all payments to ensure that the cap isn’t breached. This will mean ensuring that ‘strain costs’ are identified early in the process to allow these to be incorporated.

Employee payments will at the higher end be lower which may influence decisions about exiting as it may make them less attractive or indeed unaffordable. This may also make the option of restructuring senior roles more difficult for employers possibly trapping senior employees in roles they are not wholly committed to. That said it may promote greater transferability between roles.

There is some guidance on the order of payments in Section 6 of the draft Restriction of Public Sector Exit Payments Regulations 2019. The legislation also proposes some flexibility in the implementation of the cap. Where there is flexibility—such as the priority between cash payments and pension strain costs—these will have to be clearly communicated to the employee to allow the required decisions to be taken. It’s likely that engagement will be required at a much earlier stage in the process to facilitate this.

One major concern with the proposals is that they would create a two-tier system in the public sector between employees who are in funded pension schemes and those who are in unfunded schemes. In funded schemes the ‘strain cost’ for early retirement would be deducted from the capped figure or benefits reduced. For those in unfunded schemes no equivalent mechanism exists to recoup redundancy/early retirement costs even though the same equivalent cost would be experienced by the Exchequer. This could mean that employees (and in some cases employers) in unfunded schemes benefit from a much better deal than their counterparts in funded schemes.

Employers will also have to be very careful in the implementation period not to take decisions which could result in costs materially higher than the level of the cap when it is imposed.

What is the timetable for implementation of the changes? What are HM Treasury’s next steps?

The consultation will last for 12 weeks to 3 July 2019. Responses to the consultation may be published. Post this, the draft Regulations may be implemented as proposed or revised.

Interviewed by Varsha Patel.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Link to original article –
https://www.lexisnexis.com/uk/lexispsl/localgovernment/document/412012/8V8N-WKK2-8T41-D1GT-00000-00/Capping-exit-payments-in-the-public-sector%E2%80%94a-review-of-the-draft-regulations-for-consultation/31544

David Davison

We have analysed the 2017 Fund actuarial valuations and carried out some analysis of the employer membership in Scottish LGPS to see how this is distributed. From this we can identify what issues Funds and employers might face.

There are 11 Scottish Funds with the share of overall employers shown below.

The numbers are dominated by Strathclyde Pension Fund, Lothian Pension Fund and North East Pension Fund who account for two thirds of the employers with the other eight Funds making up only one third. Borders, Dumfries & Galloway and Shetland all account for only around 2% each.

We identified a total of 544 employers and have classified them in to the six broad Groups as shown below.

Public bodies, such as Councils, Police and Fire Service, account for around 11% of the total number of employers though these bodies will account for the vast majority of the Funds liabilities.

Leisure organisations will tend to have been formed from outsourced agreements from local authorities and will be run as autonomous organisations.  Often this switch however has left these organisations without any protection should they wish to revise their membership of the schemes and has left them saddled them with huge inherited legacy liabilities from the Councils which they do not have the underlying asset base to support. These organisations therefore are effectively trapped in schemes and leaving them without the level of autonomy they believed they had.

Similarly schools and colleges will have evolved out of public entities or be private schools with public sector links. Participation in LGPS tends to be for non teaching staff. Again these organisations will have little if any financial protection and will find any changes to their LGPS membership complex and expensive to achieve. These organisations are also likely to be facing additional financial pressures from rising costs in the teachers pension scheme as well as some having to deal with membership of the University Superannuation Scheme (‘USS’) all putting a strain on already hard pressed budgets.

Private companies will tend to participate as a result of providing out-sourced public sector services and the requirement to maintain equivalent benefits for contracted staff under Fair Deal. Some of these organisations will be protected by Council guarantees or ‘pass through’ arrangements but many will not, often leaving their shareholders oblivious to the underlying risks they are running.

That leaves the vast majority of employers (around 360) as either charities, who account for nearly 60% of the employer membership, or social housing organisations who account for about 7%, so nearly two thirds in total. In liability terms they will probably account for considerably less than 10% of overall fund liabilities. Some of these bodies may have exited the Fund since the 2017 valuation was carried out.

Some of these charities may also be undertaking public sector contracts and therefore have some form of guarantee or transferee admission body status but the vast majority will not.

The key SPPA findings were that:-

  • There were 530 employers with at least one active member. Of these 422 were admission bodies (covering both transferee and community admission bodies) of which 223 had no guarantor and so were at some point likely to be liable for a cessation payment. Of these 102 had 5 or fewer members where a cessation payment could be deemed to be payable in the short term.
  • Worryingly of the 102, 60 remain open to new members and are therefore building further liabilities which suggests either a lack of understanding of their position or a position forced upon them as a result of the Scottish LGPS Regulations.
  • Of the 121 with no guarantor and more than 5 members 94 remained open to new members.
  • There are 41 employers at greatest risk as they have fewer than 5 members and are closed to new members which mean that a cessation is imminent.
  • The cessation deficit associated with the ‘at risk’ group of 41 was estimated to be in the region of £12m-£15m (i.e. and average of around £300,000 per body). Two LGPS Funds looked at the financial position in their schemes which showed that for organisations with 5 or less members the funding position moved from around £1.93m in surplus on an on-going basis to around £9.4m deficit on a cessation basis. This very much resonates with my experience.
  • The total liabilities for the 223 admitted bodies with no guarantor were in excess of £350m and the cessation deficit could be in excess of £150m.
  • The cessation position could be materially worse now given falls in gilts yields since 2014 which highlights the issue with the cessation basis being adopted.

Based on these numbers I would expect that the position in England and Wales would be 8-10 times greater, so these issues could affect in the region of 2000 other charities and account for deficits approaching £80-£100m. A material proportion of this will relate to liabilities transitioned surreptitiously from local authority to unsuspecting charities.

Changes to Scottish LGPS Regulations in 2018 looked to provide additional flexibility to look to manage these issues however they haven’t been widely adopted by the Funds.

More research needs to be carried out to understand the pension position fully in relation to the covenant position of the organisations concerned and to look to develop solutions, and potentially further update Regulation, to allow this issue to be effectively managed.

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