Spence & Partners latest blog for Pension Funds Online –
Many charities participating in local government pension schemes (LGPS) have been increasingly frustrated by the lack of recognition of the issues they face by the schemes and indeed the Department for Communities and Local Government (DCLG) who oversee them.
The issues are not new but there remains an element of denial and finger pointing and it’s very easy to see how charities could be frustrated.
Many charities undoubtedly feel that Councils and LGPS encouraged them to join without ensuring independent advice was sought or providing any risk warnings.
Then over a number of years LGPS have sat on their hands allowing admitted bodies to continue to accrue liabilities even when they clearly couldn’t afford to do so and without providing the flexibility to address the issue.
Many charities that I’m aware of have approached LGPS over many years looking to stop accrual and arrange a payment plan and were just provided with ‘pay up or keep participating’ as options. Suddenly they’re now being blamed that the position is worse now than it was.
For many charities there is also a growing recognition that Councils have adeptly transferred historic past service liabilities in millions of pounds to them, due to LGPS inability to segregate service between employers and without making employers aware of the impact.
This has been hugely expensive for charities, DCLG and LGPS continue to try to ignore this issue and sweep it under the carpet, indeed LGPS continue to do this, with unsuspecting Academies being a prime example.
In addition, the inconsistency of approach and lack of standardised practices mean that each exercise needs to be looked at on an individual basis adding complexity and professional adviser costs when helping charities through the maze.
Consistently when these issues have been raised LGPS and DCLG just shrugged and said “problem, what problem?”.
Thankfully a recent report published by PricewaterhouseCoopers (PWC) has raised hopes that there could finally be some light at the end of the tunnel.
The PWC report was commissioned by the Shadow Scheme Advisory Board (SSAB), which was established to encourage best practice, to increase transparency and coordinate technical and standards issues for LGPS as well as providing recommendations to government for future regulation.
The Board commissioned the report as part of its deficit management project kicked off in summer 2014.
Key recommendations which will be of specific interest for admitted bodies, such as:
-More flexibility on when exit debts are triggered. The proposals suggest that debts would not be automatically triggered by the exit of the last member. The paper recognises that some minor changes to regulation will be required.
-Establishing a maximum level of prudence when calculating exit payments. Currently Schemes tend to use a gilts basis to calculate the exit cost despite schemes not investing assets in this way. This effectively means that employers paying a cessation debt are cross funding other employers who remain. This is recognised as inequitable and is also a discouraging factor for charities wishing to look at an exit. This proposal would effectively reduce cessation debts for those looking to exit the Scheme, for many to a point which may be affordable.
-Flexible exit arrangements. These could include continuing to pay contributions on an on-going basis for a prescribed period and for employers to pay their cessation debts over a much longer period. This would be extremely welcome flexibility for many small employers and is a more consistent approach with that adopted in the private sector.
–Employer exit on weaker terms. It is recognised that in some circumstances it could be in the interests of the Fund, the remaining employers and the admitted body to allow them to exit on weaker terms and small charities are cited specifically as an example.
These items certainly reflect much of the commentary supplied by charity representative bodies, charity advisers and charities themselves.
Although at this stage they haven’t fully addressed issues around the transition of prior local government liabilities to charities but it is hugely helpful to charities position and is a welcome addition to the debate.
This paper certainly raises the hope that the recommendations will be adopted by the SSAB and the implemented by Government and LGPS as quickly as possible.
The issues faced have been created by local government, LGPS and the admitted bodies and there needs to be a commitment to co-operatively finding solutions.