What do we do with a problem like LGPS?

August 5, 2015 at 09:58

The Local Government Pensions Scheme (LGPS) has received some welcome attention in review of the scheme’s deficit management carried out by PWC.

CFG believes that Direct Benefit schemes are a “ticking time bomb” for the charity sector and the LGPS certainly adds to the problem. The latest figures show that the number of members paying into the scheme has stagnated at around 1.6 million people. At the same time, the proportion of LGPS members claiming their pensions now, or are no longer paying into the scheme but are eligible for payments the future, has increased from 58% in 2009/10 to 64% in 2013/14.

As it stands, The LGPS funding deficit is £47 billion. This looks set to rise.

Improving the exit plan

For many of the 2,000 to 3,000 charities covered by the LGPS the increasing deficit renders their continued participation unsustainable. However, they are faced with the so-called choice of either staying in the scheme or paying an unaffordable exit payment.

The PWC report offers some hope that changes to the LGPS are possible. There are four recommendations in the report (see pp 33-38) which are of particular interest to charities.

More flexibility on when exit debts are triggered. The paper suggests that minor changes to the regulation would mean that employers would not automatically trigger cessation debt by the exit of the last member.

There should be a maximum level of prudence to calculate exit payments. Currently employers wanting to leave an LGPS fund have to pay an exit fee which is typically calculated on a gilts cessation basis, this is despite LGPS funds not investing the exit payments they receive in gilts. This would reduce cessation to, what will be considered by many employers, a more affordable level.

Flexible exit arrangements. The paper recommends that a consultation on more flexible exit arrangements should be carried out. The different arrangements that could be included are: 1) allowing employers to continue to pay contributions for a defined amount of time after their last active employee has left; 2) allow employers to pay their cessation debt over a longer period of time.

This supports CFG’s recommendation that more reasonable repayment periods will enable charities to meet their repayments on the understanding that sever debt repayment periods (such as we see now) that lead to insolvency only generate greater liabilities.

Employer exit on weaker terms. It is recognised that in some circumstances it could be in the interests of the Fund, the remaining employers and the admitted body to allow them to exit on weaker terms and small charities are cited specifically as an example.

“Consider the scenario of a small charity that is financially weak and can offer no security. If it were allowed to continue to accrue benefits in the Fund, the Fund’s risk will continue to increase over time. However a managed exit of the employer would stop liabilities growing further, and might be justified even if this meant entering into a relatively long recovery plan with a weak employer and little or no security.”

Given that report has been carried out by a reputable company and was commissioned by the Shadow Scheme Advisory Committee, a statutory board, there is reason to be hopeful that the recommendations will be listened to…

…But the recommendations could go further

The PWC report is not charity-focused per se and so it would perhaps be too unforgiving to expect a detailed discussion of the challenges faced by charities in the LGPS.

However, one of the key issues that I do want to highlight here is the transfer of liabilities for existing LGPS members to the most recent employer. What this means is that those charities that have been contracted by the council to deliver a service and thereby take on an employee who previously worked for the council, can be expected to take on 100% of assets and liabilities for that employee.

Charities can therefore become liable for historic liabilities accrued before the employee has transferred to the charity. This, in effect, outsources the risk for past deficits to the charity, making local government contracts punitive.

This should not only be of concern for charities, but also local authorities. Contracts represent an effective way for charities to deliver their charitable objectives whilst also providing a vital source of income. For local authorities, the proximity of charities to the local community means they are well-placed to play a pivotal role in shaping and delivering public services at the local level.

It is therefore important for both charities and local government to ensure that charities are not prohibited to take on contracts by inequitable pension risk sharing.

For a more detailed discussion of the issues see CFG’s consultation response on the LGPS amendment regulations and our Pension Manifesto.