In September 2020 I trailed the new flexibilities being introduced in LGPS in an LGPS Bulletin. The problem many third sector organisations faced was being trapped in an LGPS stuck between increasingly unaffordable annual payments and an unaffordable exit payment. The problem had been severe enough to see a number of charities driven into insolvency by the weight of their pension liabilities.
Encouraging new Regulation was introduced which would provide much needed flexibility either to agree a lengthy period to pay down any debt due or to utilise a new ‘deferred debt’ option which would allow the organisation to continue to participate in the scheme but without accruing any additional benefits for staff thereby making an exit more affordable.
Before implementing the new Regulations local authority funds needed to engage with their actuary and legal advisers prior to incorporating their proposals in their Funding Strategy Statements and consulting with their admitted employers on these. There was also LGPS Scheme Advisory Board Guidance issued in March 2021. Over the last few months therefore we’ve started to see these details emerge across Funds.
The process being adopted looks broadly consistent across the Funds I’ve reviewed:-
- The default position for Funds remains that they would seek a full cessation debt payment immediately as a lump sum on exit however they have discretion to consider alternatives such as a Debt Spreading Arrangement (‘DSA’) or Deferred Debt Arrangement (‘DDA’).
- Under the DDA the employer would defer their obligation to make a cessation debt payment and continue to make past service deficit payments to the Fund. These payments would be reviewed as part of the triennial actuarial review process. This is effectively supposed to be employers continuing on-going participation but with no contributing members.
- To seek a DSA or DDA the admitted employer should make a proposal to the Fund providing the reasons for the request and any supporting information.
- The Administering Authority will then consider the request. The assessment will be primarily focussed on the employer covenant (ability to pay) and also any steps the employer can take to strengthen the covenant for the scheme such as the provision of security or guarantees. The Fund is likely to commission covenant research from a financial specialist as part of the process.
- There is then likely to be some discussion / negotiation around the terms of any arrangement covering the contributions, term and security arrangements.
- Once a basis is agreed this will then be documented in a formal legal agreement.
- This process is likely to take a minimum of 3 months and in my experience potentially 6 months when you add in charity Board and staff engagement.
Clearly the more challenging the financial circumstances which the charity finds itself in the more difficult any negotiation is likely to be. It has however been recognised right back to the original consultation on the proposed changes that even where an employer provides a weak covenant entering in to some sort of agreement which reduces future risk by stopping further accrual could be preferable to the status quo and provide greater protection for continuing employers and this only seems logical. It cannot be in anyone’s interests to see employers continue to accrue liabilities well beyond the point they are affordable and then to continue to provide for further accrual.
Funds also need to recognise when pursuing security that they are highly unlikely to have security in the current scenario where there is further accrual so pursuing it in a lower risk scenario where accrual is ceasing is highly inconsistent.
Given the budgetary pressures charities are likely to be facing as we emerge from Covid these changes represent a significant opportunity for organisations to manage a major financial risk. 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