Charities enrolled in the Local Government Pension Scheme have been overpaying on exit fees to the tune of hundreds of millions of pounds over the past decade, warned pensions expert David Davison.
Davison, who is a director and owner of the pension consultancy Spence and Partners, has written a series of blog posts this year arguing that LGPS schemes are using an excessively onerous method for calculating exit debts.
He argues that basing this calculation on gilts (government bonds) is putting charities at the mercy of market fluctuations, with current low gilt yields leading to unnecessarily high cessation debts.
A similar conclusion was reached in research conducted by PwC on behalf of the Scheme Advisory Board for England and Wales back in 2015, but the advice was never acted upon. The report stated: “We recommend that funds should not be permitted to use very onerous assumptions for exit bases.”
The result is that charities are locked into defined benefit pension schemes where they cannot afford to remain but where they cannot afford the exit payment required to cease accruing further liabilities.
Last year the government introduced new regulations allowing pensions schemes to stagger exit payments rather than charge them in one lump sum, but the rules do not apply to LGPS schemes as they are not covered by section 75 regulations.
Lack of warning about the risks
Davison estimates that around 2,500 to 3,000 charities across the UK are enrolled in LGPS schemes. He says that most were encouraged to do so by local councils and pension funds without being provided with any risk warnings about their participation.
Davison also says that charities are effectively cross-subsidising large, historic liabilities built up in the public sector by schemes’ failure to ringfence them.
Speaking to Civil Society News, Davison confirmed that these issues are still very much a problem for charities. “Definitely, it’s a huge problem,” he said. “Any organisations that are either effectively picking up liabilities from the council over time, or any organisations that are looking at exiting LGPS at any point in time, it’s going to affect either one of those, and the costs are likely to be very high.”
The Local Government Association, which provides the secretariat for Local Government Pension Committee, was approached for comment but did not respond.