Last month charities under the London Pension Fund Authority scheme saw their payments sharply rise due to changes to how their debt and risk of default is calculated. David Davison warns other local government pension schemes could follow suit.

The announcement from the London Pension Fund Authority (‘LPFA’) that they are implementing a risk based contribution method should strike fear in to the hearts of admitted bodies throughout the UK, despite the positive spin they’ve tried to put on it. Whilst LPFA are only one of around 100 autonomous local government pension schemes, what happens in one has a habit of filtering across the others.

So what does this “risk based employer contribution assessment” really mean? In simple terms contributions will be higher the greater the risk the admitted body is likely to present. A stronger assumed valuation basis and a shorter recovery period will have a very significant effect. So let’s not try to sugar coat this – for most charities, participation is going to cost more and for many considerably more.

Many charities will undoubtedly see some level of double standards in this approach. For many, having been forced, or at the least strongly coerced, to participate in these schemes, organisations will have witnessed their liabilities and costs rise. Organisations then find themselves given Hobson’s choice when it comes to try to manage these pension risks – either an unaffordable cessation debt or to just continue building more liabilities which they can’t afford.

Many Local Government Pension Schemes having been sleeping on the job and not really alive to the issues faced by many of these admitted bodies.  Apparently, the solution is now to jack up the contributions, for many to levels approaching the cessation cost, and just await the undoubted carnage. Must seem like a good idea to someone! Had LGPS pension managers been more alive to this issue, they would have had the option to force admitted bodies to cease further accrual and then negotiate a recovery plan.  This would surely have been in the interest of those organisations remaining in the scheme.

Many LGPS have shown little appetite to try to assist admitted bodies. Unlike in private sector multi-employer schemes, there is no requirement under the LGPS regulations to impose a cessation debt at all. The LGPS administrator, in conjunction with their actuary, just chooses to do so. The cessation basis used fully replicates the equivalent buyout basis applicable under section 75 even though the scheme will never wind-up, staff benefits will never be secured and the scheme will continue to be funded on an “on-going” basis.

This means that any organisation which can afford to settle their cessation debt is effectively cross subsidising those participants which remain.  Charities cross-subsidising a local authority? Seems a touch inequitable to me.

Through a DWP working party, and working with CFG, we put some suggestions to LGA about areas for improvement focusing on a greater clarity, consistency, flexibility and fairness of approach in scheme funding. The feedback we received suggested that the view held in the LGPS was that change was unnecessary as they were unaware that any problems exist.

Charities participating in LGPS need to make sure that their voice is being clearly heard by schemes as this would suggest that the issues are not being highlighted and therefore solutions being considered.

I can assure LGA that a very significant and pressing problem does exist. There is a huge variation in approach adopted by each LGPS and this lack of consistency means that admitted bodies are unsure where they stand and are then forced to take what is often expensive advice to identify their position and negotiate each arrangement on a totally be-spoke basis. This is highly inefficient.

Organisations need to be allowed to (or in some cases forced to) cease accrual without triggering a cessation debt and allowed to agree a sensible funding plan which makes the continued survival of the charity more likely and therefore secures continued funding for the scheme. Given the continuation of the scheme it needs to be recognised that effectively any contributions paid above the on-going basis are effectively a windfall value to the scheme.

These sorts of measures would allow schemes to better protect their funding position for the remaining participants while giving some much needed flexibility to charities to better manage their pensions risk. This would be an announcement I would welcome seeing!