Based upon recent experience I would expect an increasing number of charities participating in LGPS to be having potentially difficult conversations with their auditors this year around their going concern status.
Auditors are becoming increasingly aware that the risk of a cessation debt trigger can be high as active membership in LGPS reduces. This becomes a material concern as active membership levels fall below 5 and particularly when they get down to 1 or 2, as if everyone leaves it is likely an unaffordable debt would become due.
So even if on the face of it any deficit identified via the FRS102 disclosure may look to be covered by charitable assets this may well not be the case on an exit basis. The FRS102 calculation is carried out using a discount rate set based on corporate bond yields however an exit / cessation debt would in most cases be calculated on a ‘nil risk’ basis using lower yielding government gilts. This basis results in much higher liabilities than on an on-going or accounting basis and therefore a much greater deficit.
If this deficit is higher than the net assets of the charity the auditor will be likely to be concerned about the charities future viability if a debt triggers such as via the last member leaving service, retiring or dying.
Charities need to be aware of this. It is worth engaging with Funds to understand what options are available once the last member leaves. In my experience it is much better doing this prior to the actual event as LGPS tend to have much less flexibility once a cessation event has actually occurred.
New Regulations adding greater flexibility on exit from Funds were enacted in 2020 in England & Wales and are likely to be added in Scotland in 2022, which should assist both practically and also in providing auditors with a clear route to allow them to sign off on the charities going concern basis.
ICAS, the professional accountancy body in Scotland, has published a hugely helpful and very readable guide for charity trustees on going concern. As the ICAS guide highlights charity trustees need to be alive to these risks.