A concerted campaign to provide charities who participate in the local government pension scheme with greater flexibility in managing their risks and associated costs at last seems to have finally resulted in a positive outcome.
The recent publication by the Ministry of Housing, Communities & Local Government of a “Review of employer contributions and flexibility on exit payments” at last seems to offer some hope for charities seemingly trapped in LGPS.
The problem has always been that when charities run out of contributing members or look to exit LGPS a cessation (exit) debt will be calculated. This is carried out on a ‘nil risk basis’ which means that the liabilities, and therefore any deficit, is much higher than on an ‘on-going’ or FRS102 accounting basis. Many third sector organisations therefore find themselves with the Hobson’s choice of continuing to build additional unaffordable liabilities or an unaffordable exit payment. A number of organisations have recently found themselves driven in to insolvency by the weight of their pension liabilities.
In order to help with this the Government is now planning to amend the LGPS Regulations in two key ways:-
- Greater flexibility on exit payments – this would allow exiting employers to enter into agreements with LGPS to fund any cessation debt due over a period of time. This would allow uncertain pension liabilities to be turned in to a stream of fixed payments to be set over an affordable agreed term.
- The introduction of a Deferred Debt option – this would allow schemes to defer any exit payment and to permit the employer to carry on in the scheme on an on-going basis. The employer would retain all the same obligations to the scheme with future payments uncertain. However, immediate costs are likely to be lower and therefore much more affordable, allowing employers to better manage the risk of future benefits building up. Valuations would be carried out regularly and contributions adjusted if necessary.
These changes will be hugely welcome for many charities.
Fortunately, a number of Funds had already seen the common sense in making pragmatic arrangements to deal with exits however, to date they have been in the minority with the vast majority choosing to await a formal change in Regulation, which hopefully now should not be far away.
It is proposed that the new Regulations will provide Funds with a lot of discretion over how they are operated based upon their local experience. To ensure consistency and transparency funds need to consult with their professional advisers and to publish their approach in their Funding Strategy Statement.
Given the imminence of the changes, the level of control this is likely to provide Funds and the value in dealing with further accrual as quickly as possible I would like to think that they should be prepared to engage with charities to look at their future options straight away, especially given that any solution is likely to take a number of months to agree. Charities should therefore engage with their professional advisers and the Funds to consider what approach would best suit them.
Article first published in Charity Finance Group Finance Focus – September 2020.