What charities need to know about the Local Government Pension Scheme

June 1, 2016 at 14:56

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Charles Russell Speechlys on behalf of CFG, have produced a briefing to set out charities’ options for participation in the Local Government Pension Scheme (LGPS) and managing exit payments. This was done with a view to better equip charities to understand the potential risks of taking on public service contracts, before they sign on the dotted line.

You can now download the briefing on the CFG website.

This blog post covers:

What is the LGPS?

The LGPS-charity Problem

The briefing: what you will learn

Where can I get more information about the LGPS?

Throughout this post I assume a certain level of knowledge of the challenges that charities in the LGPS face.

What is the LGPS?

The scheme is made up of a number of individual funds which are maintained by each local authority across England and the devolved nations. Each fund has its own terms for participation set out in their Funding Strategy Statement.

The LGPS was originally established as a pension scheme for people working in the public sector. However, more and more employers outside of the public sector, including charities, universities and housing associations are joining the LGPS. With 10,647 employers registered, representing an increase of 14% in 2013/14.

The LGPS is an actual pension fund with assets and liabilities, and therefore run the risk of deficit. In fact, at the last valuation in 2013 the collective funding deficit of all of the funds stood at £45m.

The LGPS-charity problem

When charities take on local government contracts they are required by Fair Deal 2013 or the Best Value Authorities Staff Transfers (Pensions) Direction 2007 to make sure that any staff that are transferred to the charity as part of the contract agreement continue to be a member of the LGPS.

This means that charities are required to sign an admission agreement to become a participating employer in the LGPS.

However, many charities are not fully aware of the full costs and financial risks that the LGPS can pose to their organisation before they sign on the dotted line.

Whilst often it is very hard to negotiate with the Administering Authority, there is room in the regulations for charities to negotiate a better position before the contract starts. The aim of this briefing is to highlight where this flexibility exists and help charities think through some of the issues before they agree to take on a public service contract.

The briefing: what you will learn

The briefing addresses the three key issues that charities face in participating in the LGPS and the potential solutions available to them.

1. Uncertainty regarding on-going contributions

The Administering Authority for each Pension Fund has to secure an actuarial valuation of the Fund every three years.

Through this process the actuary advises the Fund on what contributions each employer in the Fund should pay. This takes into account the cost of future accrual so as to ensure the Fund’s financial solvency over the long term.

The issue is that charities cannot control the assumptions used by the actuary, or indeed the Fund’s investment strategy.

Therefore, there is a great deal of uncertainty in the contribution rate that charities will have to pay after each evaluation. This makes it difficult for charities to plan over the long term.

The briefing explores some possible solutions such as setting fixed rate contributions.

2. The assumption that charities must always take on responsibility for funding past benefits of transferring members at the start of the contract.

I have previously written about the fact that an LGPS Fund can transfer liabilities for existing LGPS members to the most recent employer.

What this means is that those charities that have been contracted to deliver a service and thereby take on employee who previously worked for the council, can be expected to take on 100% of the assets and liabilities for that employee.

The briefing explores the possible solution of charities negotiating an assumption of 100% funding when the charity enters into the scheme.

3. The issue of material exit payments.

The decisions regarding how much a charity has to pay when it looks to exit the payment – i.e. when the public service contract comes to an end – is made by the Administering Authority.

It is the Administering Authority that decides whether to calculate a charity’s exit payment on an on-going basis or a cessation basis. The latter often can mean that charities are landed with a significant increase in its liabilities.

The Authority also decides how much of these liabilities should be covered by an exit payment, and the length of period for that payment, or whether such a payment is due at all.

The briefing looks at whether there is room in the legislation for charities to avoid material exit payments. For example, it investigates a new flexibility that has been introduced to the regulations to allow charities to suspend participation in the LGPS for up to 3 years without triggering an exit payment. This can be implemented if the Authority believes that the charity is likely to have one or more active members contributing to the fund within that time. This could particularly benefit charities for which delivering public service contracts is a regular occurrence.

Where can I get more information about the LGPS?

The Pensions and Lifetime Saving Association’s (PLSAs) have recently published the first installment in their series of guides to the LGPS.

CFG are represented on the Steering Group set up to help shape these publications. You can download the guide for free from the PLSA website.