Charities in Scotland have for a long time found themselves trapped in Local Government Pension Schemes struggling to pay contributions and deal with ever increasing balance sheet liabilities while being unable to afford to exit schemes to deal with these issues given an unaffordable cost of exit. At last help may be at hand.
On the 1st November 2021 the Scottish Public Pension Agency (‘SPPA’) launched a consultation on adding additional exit flexibilities to the Scottish LGPS Regulations. These proposed changes replicate those introduced in England & Wales in September 2020 [Covered in BULLETINS 42 and 48].
The new Regulations introduce the concept of the Deferred Debt Agreement (‘DDA’). This would allow schemes to defer any exit payment and to permit the employer to carry on participating in the scheme on an on-going basis, but without any active members. 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.
By remaining a part of the scheme the employer would continue to benefit from investment return and favourable member movements which could reduce the ultimate cost of providing the benefits. Clearly however the funding position could be volatile so organisations will need to be able to manage changes in their funding position and therefore contributions.
We have already seen some enlightened Scottish Funds recognise the issue which many charity boards face and pre-empt the change in Regulation by offering employers access to greater exit flexibility but it is none the less good to see these actions formalised in Regulation and therefore available for use across all Scottish schemes.
It is also welcome to see the addition of a provision which will allow any cessation debt calculated to be guaranteed for 90 days. Historically there has been an issue where an exit illustration has been provided but by the time the exiting employer has completed their consultation and actually exited the amount of the deficit has deteriorated so much as to now make the exit unaffordable. This will avoid this issue creating greater certainty for all parties.
The proposed changes also provide funds with flexibility to change contributions mid valuation should employer liabilities change significantly, or if there has been a change in the ability of the employer to pay or where an employer has requested a change.
The consultation also covers proposed changes to early retirement, the benefit underpin enacted in 2015, survivor benefits and the LGPS cost cap.
The consultation closes on 7 January 2022 and once Regulation has been enacted Funds will need to consult with their Fund Actuary to agree their revised practice and incorporate this in their funding strategy statement so it may well be towards the end of Q1 2022 or in to Q2 2022 before everything is fully documented. However, I would expect now that Funds are aware of the contents of the proposed changes they would be prepared to discuss options in advance.
These proposals, along with a number of flexibilities already adopted by Funds, provide charities with an array of choice over how they better manage their LGPS pension liabilities.
I would therefore encourage charities to consider this option with their advisers and engage early with their Fund to explore which options suit them best.