The objective of bringing LGPS funds more in line with all other UK pension schemes and forcing them to invest in the best interests of members came a little closer after the government suffered a major defeat in the High Court at the end of June.
The government had issued guidance in September 2016 requiring LGPS funds to have environmental, social and governance (ESG) policies but added a requirement that funds could not “pursue policies that are contrary to UK foreign policy and UK defence policy”.
The Palestine Solidarity Campaign (PSC) launched a bid in the courts to overturn the regulations via a judicial review. It contended that the government had acted outside its powers and it was “lacking in certainty”. It also cited Article 18.4 of the EU’s directive on the Activities and Supervision of Institutions for Occupational Pension Provision (IORP) that states “member states shall not subject the investment decisions of an institution…….to any kind of prior approval or systematic notification requirements”.
Judge Sir Ross Cranston only agreed with the first argument citing that he couldn’t see “how the secretary of state had acted for a pensions’ purpose”. He therefore granted the judicial review.
A spokesman for DCLG said that the government would consider whether to appeal.
While the judgement was broadly welcomed it may not be quite the end of the issue as trade unions encourage the government to implement EU IORP directive into LGPS.
The judgement does however mean that Funds will have more freedom to take positions on ethical investment focussed wholly on the best interests of scheme members which must be a benefit.
In April this year the DWP launched the snappily titled public consultation ‘The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017’. The consultation, which closed on the 18th May, was looking to make suggestions to deal with the perennial issue of Section 75 debts. A Section 75 debt triggers when an employer ceases to have active employees in a multi-employer scheme while other employers still do.
All very interesting (or not) but what does this have to do with LGPS you may ask, especially given neither the Section 75 legislation nor the DWP consultation actually cover LGPS? However while Section 75 legislation may not specifically apply to LGPS the principles on exit / cessation and the issues the consultation is looking to address are pretty much the same. In fact some of the specifics of LGPS actually make the options for employers even more restrictive than in other ME schemes.
The consistent issue is that neither multi-employer defined benefit schemes (MEDBS) or LGPS have a mechanism to allow participants to cease building up benefits for all members without automatically trggering a debt at that point. This is a mechanism available in standalone and segmented multi-employer schemes allowing employers and trustees to more effectively manage risk. The lack of this option encourages participants to continue to build up additional benefits for staff way beyond the point where they are affordable, placing their very existence at risk, reducing the covenant of member benefits and risking placing an additional burden on other organisations who participate in the scheme. Legislation as it sits at the moment not only limits an employer’s ability to manage this risk but also ties the hands of those running the pension scheme.
Many employers are now facing a cliff edge as their membership numbers fall. Many recognised the risk and associated costs of DB provision and closed their schemes to new entrants. This just makes a movement towards ultimate cessation inevitable as eventually they will run out of active members. Research recently carried out by the Scottish Government in relation to Scottish LGPS has highlighted this wall of risk and Funds throughout the rest of the UK will be no different.
A way that many private sector MEDBS have looked to deal with the issue is either to close to future accrual for all employers simultaneously or to add a defined contribution scheme under the same trust as the defined benefit scheme thereby allowing employers to have active participation but to have stopped accruing further DB liabilities. Unfortunately neither of these solutions is open to LGPS employers.
In one of my previous Bulletins ‘An Alternative Approach’ I highlighted the potential impact of the timing of this debt trigger and how this was effectively a one-sided equation stacked in favour of the Fund and unfortunately an equation that many admitted bodies are unaware of until it’s too late.
The DWP Consultation sought comments on a potential solution called a deferred debt arrangement (‘DDA’) which would allow employers to cease further DB benefit accrual and continue to fund the scheme without triggering the S75 debt. Employers would retain all the same obligations towards the debt and scheme to protect members and the Trustees but it would permit a more practical and orderly exit from DB accrual.
There does seem to be consensus at this stage that something does need to be done, though some variation in the mechanism to achieve it. I can only hope that we get some practical and workable proposals out of the consultation and that it is more widely applied covering LGPS. Action needs to be taken now but given our current political environment and the Governmental focus on Brexit it would be a brave man to predict we will see anything substantive in terms of legislation in the short term, let alone seeing it extended to LGPS, even though in my view it quite clearly should be.
There is now a greater acceptance of the issues charities face through their participation in local government pension schemes however it has been difficult to identify the quantum of the problem and from there arrive at logical and implementable proposals for change…until now!
Over the past couple of years the Institute of Chartered Accountants in Scotland (ICAS) via its Pension Panel has been engaging with the Scottish Government and the Scottish Public Pension Agency (SPPA) to look to better understand the scope and impact of these issues to allow recommendations to be made.
Helpfully, following an initial engagement with Scottish Deputy First Minister John Swinney in the middle of 2015, he helpfully issued a communication to all Scottish LGPS at the end of October 2015 requesting that Funds did not push charities to insolvency as a result of their pension liabilities pending a review of the Regulations.
In addition at the same time he requested the Scottish Scheme Advisory Board (SSAB) to carry out research amongst the Scottish LGPS to look to identify the quantum of the problem. This research was carried out and delivered to SSAB mid 2016 although it was not released more widely until mid 2017. Following its publication ICAS have commented on the key findings and made some recommendations for change in a report issued on the 25th September 2017.
Whilst based on the research carried out on Scottish LGPS it is important to emphasise that this research and the resultant ICAS recommendations have a UK wide application.
Key findings from the SPPA Data Collection Exercise
- All data supplied was as at 31 March 2017.
- 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. 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).
- The total liabilities for the 223 admitted bodies with no guarantor were in excess of £350m and the cessation liabilities 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.
A summary of the recommendations
- Admitted bodies should not be burdened with gilts based cessation deficits for liabilities inherited from all public service bodies. It is wholly unreasonable for a member of staff to transfer from the Council, for example, and then have the admitted body pick up the cessation cost of liabilities built up while the individual worked at the Council.
- The treatment of these inherited liabilities should be consistent across all LGPS Funds and should apply to all benefits transferred in from public bodies.
- Organisations carrying out out-sourced arrangements for public bodies should have their pension liabilities dealt with on a ‘pass through’ basis with them being able to be transferred back to the public body at the end of any contractual term. This would avoid local authorities seeking to walk away from their liabilities, leaving them with the out-sourced contractor.
- It should be compulsory for LGPS Funds to provide all admitted bodies with an annual update on their cessation amount.
- The LGPS Regulations should be amended to prevent the automatic trigger of a cessation debt on the exit of the last exit member. This would allow employers to continue to pay contributions on an on-going basis and manage their contributions and ultimate exit.
- LGPS should provide admitted bodies with greater flexibility in payment amount and term.
- There should be a maximum level of prudence applied to cessation calculations with a gilts basis not being used as the default.
- Where it is clear that an admitted body cannot afford to exit the scheme and settle a cessation debt they should be allowed to exit based upon affordability and a payment plan agreed.
Many of these measures have already been implemented in some Funds so the proposals are wholly achievable. There are however huge inconsistencies in the approach taken by Funds and everyone would benefit from having access to a consistent series of options. The report provides a good template and it’s now up to government to implement much needed change.