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.