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 through being unable to afford to exit schemes as the exit payment due was unaffordable.
At last an escape route may be possible.
On 3rd May 2022 the Local Government Pension Scheme (Scotland) Regulations 2022 were laid before the Scottish Parliament and come in to force on the 1 June 2022, replicating changes already introduced in England & Wales in September 2020.
These new Regulations introduce the concept of the Deferred Debt Agreement (‘DDA’). This allows schemes to defer any exit payment and permit the employer to carry on participating in the scheme on an ‘on-going’ funding basis, but without any active members.
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. The employer would retain all the same obligations to the scheme and the funding position will be volatile so organisations will need to be able to manage changes in their funding position and potentially contributions.
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.
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.
Funds in Scotland are evolving and this one of a number of changes we are witnessing which provide employers with increased flexibility:-
- Cessation debts 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.
- Changes to the exit valuation basis - We are witnessing some Scottish Fund actuaries adopt a different exit calculation basis. Historically this has always been on a ‘nil risk’ gilts basis however actuaries have evolved to a probability of success basis which in most cases materially reduces the cessation debt and indeed for many employers make it affordable. It is to be hoped that this more equitable approach will be adopted more consistently across Scottish Funds.
- Wider range of investment options available - Some Funds are considering widening the range of investment portfolios available to their employers which would allow them to more closely target their specific membership profile, and indeed provide lower risk and less volatile funding for those looking to exit on a DDA basis. This could create greater certainty of contributions with a much lower risk of material changes.
Where your LGPS membership is presenting your organisation with cost and risk challenges I would encourage you to consider reviewing your position in light of these new options.