David Davison says that many charities have historically wanted to pull out of local government pension schemes, but not been able to afford to; new proposals could help them out.
Many charities participating in local government pension schemes have been faced with a Hobson’s choice of being unable to afford to exit the scheme and recognising the unsustainability of continuing to participate. Thankfully others are beginning to recognise issues many charities have been aware of for many years and a recent report published by PWC has raised hopes that there could finally be some light at the end of the tunnel.
The PWC report was commissioned by the Shadow Scheme Advisory Board (SSAB), which was established to encourage best practice, increase transparency and coordinate technical and standards issues for LGPS as well as providing recommendations to Government for future regulation. The Board commissioned the report as part of its deficit management project kicked off in summer 2014.
Section 6 of the Report provides a number of specific recommendations which will be of specific interest for admitted bodies such as:
- More flexibility on when exit debts are triggered. The proposals suggest that debts would not be automatically triggered by the exit of the last member. The paper recognises that some minor changes to regulation will be required.
- Establishing a maximum level of prudence when calculating exit payments. Currently Schemes tend to use a gilts basis to calculate the exit cost despite schemes not investing assets in this way. This effectively means that employers paying a cessation debt are cross funding other employers who remain. This is recognised as inequitable and is also a discouraging factor for charities wishing to look at an exit. This proposal would effectively reduce cessation debts for those looking to exit the Scheme, for many to a point which may be affordable.
- Flexible exit arrangements. These could include continuing to pay contributions of an on-going basis for a prescribed period and for employers to pay their cessation debts over a much longer period. This would be extremely welcome flexibility for many small employers.
- 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.
These items certainly reflect much of the commentary supplied by charity representative bodies, charity advisers and charities themselves although at this stage they haven’t fully addressed issues around the transition of prior local government liabilities to charities but it is hugely helpful to charities position and is a welcome addition to the debate.
This paper, from such a reputable source, certainly raises the hope that the recommendations will be adopted by the SSAB and the implemented by Government and LGPS as quickly as possible.
David Davison is a pensions consultant at Spence & Partners