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Local authority three-card trick 1

Governance | David Davison | 20 Aug 2010

David Davison exposes the costly implications of dabbling with local authorities as they deliver the three-card pensions trick.

We’ve all seen and marvelled at the skill and dexterity of magicians and con-men as they perform myriad variations of the three-card trick. The one common feature is that, no matter how hard we look to follow the queen or the ace, when we pick a card it’s never the one we think and we just have to keep handing over more and more money to the smiling trickster.

Unfortunately many charities and not-for-profit organisations are recognising that some similar sleight of hand has been performed by local authorities when they outsourced many of their services.

In the same way that a con-man might let a mark win a few hands to encourage them to take a final big gamble, many organisations that thought they had “won” a contract don’t see the pay-off coming until it’s much too late.

What numerous organisations failed to spot was that when they took on staff from the local authority, and retained membership for those staff in the local government pension scheme, they took on responsibility not only for pension liabilities for the future service period of those staff but also for all the service built up prior to their transfer.

I’ve seen recently one organisation where 70 to 80 per cent of the pension liabilities allocated to them had built up prior to their establishment. In other cases I’ve seen pension liabilities many times the value of the organisation for exactly the same reason. That’s one way for local authorities to help sort out their pension liabilities, but whilst not exactly a con trick, it’s not particularly fair or reasonable either.

Ownership of these liabilities exposes organisations to considerable additional risk as final salary pension liabilities are by their very nature unknown. Actual returns below those assumed or major changes in staffing numbers can result in a request for the payment of increased contributions out of a fixed budget which will reduce the amount available for front-line services. The termination of a contract can trigger a request for a lump sum payment which is considerably beyond the ability of the organisation to meet with inevitable results.

The terms of any out-sourcing agreement are established at outset as part of the transfer terms document and any pension scheme admission agreement and it is vital that organisations seek independent professional advice over the terms included here if they are not to fall victim to a very expensive three-card trick.

David Davison is a director of Spence & Partners Actuaries and Dalriada Trustees

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