Posts by David

David Davison

David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers
David Davison

An Amicable Divorce

The question I’m asked about most often is about the cost of exiting a LGPS, as for most charities the costs can come as a bit of a surprise. One organisation I worked with recently had a small surplus at their last actuarial review and in their accounts, but when a couple of their staff left unexpectedly they were immediately hit with a bill from the fund in excess of £500,000, pretty much wiping out all their assets and placing them on the brink of insolvency. So what do you need to know?

Should you run out of active members in your LGPS fund (and not be in a position to add any new ones, for example if you have a closed agreement or a local authority contract has come to an end) under the LGPS Regulations the fund must commission the Fund Actuary to complete a cessation valuation. Whilst the Regulations do not prescribe how this calculation should be carried out, the actuaries undertaking the calculation will use very prudent ‘least risk’ assumptions based on gilt yields. This will result in liabilities being much higher than is the case on either a funding or accounting measure. Often this is the first point that an admitted body may be aware of this liability, as unfortunately numerous funds still do not provide organisations with an annual estimate of the potential cessation debt.

The conservative approach taken reflects that once an organisation exits an LGPS, the fund cannot pursue them for any extra money if the cost of providing members’ benefits is higher than expected. The fund therefore wants to make sure that there is a minimal risk that other employers in the fund would be responsible for paying for any of these exiting liabilities. As such the approach is a protection for all. However, what has been called in to question more recently is whether the basis adopted is reasonable, and indeed suitable in all circumstances. What is clear however, is that there is a great reluctance on the part of the funds to change, not surprisingly.

Whilst the approach to calculating a cessation debt across Funds, and across the various fund actuaries, tends to be consistent, the circumstances in which it applies can vary significantly. For example, some funds offer public sector out-sourcers ‘pass through’ protection, which means that any cessation debt is calculated on the much lower on-going funding basis. Other funds recognise where the last employer has inherited significant liabilities from a public sector body, and will account for these by ensuring that the public sector body picks up their fair share. Unfortunately, though the vast majority of funds do not.

Some funds are prepared to negotiate around the cessation amount payable, subject to affordability and the term of any repayment. However, in most circumstances these negotiations need to be conducted in advance of any formal debt trigger / calculation.

Admitted bodies therefore need to be aware of their situation and look to plan for it, as far in advance as possible, as allowing a cessation event to just happen could have catastrophic implications for the charity.

In my next bulletin I’ll consider why change should be considered.

David Davison

They always say that sequels are never as good – well here’s a publication that well and truly proves that adage wrong.  This fourth edition has taken over nine months to compile and provides over 50 pages of invaluable information, compiled by industry experts, which will hopefully allow finance directors, HR managers and CEO’s to find information on the issues which affect their charity and therefore help them get the most from their pension provision.    

I am delighted to have been able to contribute to, and indeed sponsor, the publication of “Navigating the Charity Pensions Maze” produced by Charity Finance Group (CFG) having provided input in the area of Section 75 debts in non-associated multi-employer defined benefit schemes, and providing our experience on how the problems can be addressed.  We believe that this document will provide charities with an invaluable reference guide to the complex pension issues they face.

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David Davison

Fortunately my expectations for the Green Paper published last week weren’t high which was good as at least I didn’t have to deal with crushing disappointment. I did have some hopes that after a myriad of working parties and consultation on Section 75 and multi-employer schemes over the last few years, that expectant charities at last may see some revelation on an issue that has been dogging the sector for well over a decade. There was indeed a revelation, of sorts! It was just that they needed more consultation!! How could anyone not understand the issues here? The problem isn’t about lack of understanding of the issues, but about lack of will to do something about them.

The commentary on multi-employer DB schemes is contained in paragraphs 400-407 in the ‘Consolidation of Schemes’ section, which is somewhat ironic given that most of the necessary change for multi-employer schemes results in anything but consolidation!!

In point 405 there is one tantalising comment, namely “We intend to consult on a new option employers can consider to manage the employer debt in these circumstances.” Ah, what could this be, and why was it not actually in the Green Paper?

My greater concern is that at the end of the Consolidation section there are three key questions posed in relation to multi-employer schemes:- Read more »

David Davison

Many charities participating in local government pension schemes (‘LGPS’) have been increasingly frustrated by the lack of recognition of the issues they face by the schemes they participate in and, indeed, from Department of Communities and Local Government (‘DCLG’) who oversee them. The issues are not new but there remains an element of denial and finger pointing, and it’s very easy to see how charities could be understandably frustrated.

I often experience a feeling amongst charitable admitted bodies that Councils and LGPS encouraged them to join Funds, without ensuring independent advice was sought or providing any risk warnings about the step they were taking, and have now just abandoned them to their fate. Whilst, to a great extent, the problem has been capped over recent years as admission to Funds has become much more rigorous, this unfortunately does nothing for all those employers admitted before that stable door was closed.

For those employers, LGPS have sat on their hands allowing organisations to continue to accrue liabilities even when they clearly couldn’t afford to do so, and without providing the flexibility to address the issue. Many charities I’m aware of have approached LGPS over many years looking to stop accrual, and arrange a payment plan and were just provided with pay up or keep participating as options. Now, as funding positions have deteriorated and funding costs have increased these same schemes are pointing fingers at these same trapped charities for their inability to be able to continue to participate.

For many charities there is also a growing recognition that Councils have adeptly transferred historic past service liabilities in £millions to them, due to LGPS inability to segregate service between employers and without making employers aware of the impact. This has been hugely expensive for charities and DCLG and LGPS continue to try to ignore this issue and sweep it under the carpet. Indeed, LGPS continue to do this with unsuspecting Academies being a prime example.

A limited number of Funds and Local Authorities have sought to deal with the issues however, the response has been at best patchy and has lacked any level of standardised practice. Indeed these ore enlightened approaches attract a “nothing to do with me” response when raised with pension managers from Funds not employing them and for many admitted bodies they are completely unaware of the alternative options explored and implemented elsewhere. A lack of consistency of approach also means that each exercise needs to be looked at on an individual basis, adding complexity and professional adviser costs when helping charities through the maze.

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 commissioned a report from PWC as part of its deficit management project kicked off in summer 2014.

The report was published in July 2015 and the key recommendations which will be of specific interest for admitted bodies are:

  • 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 on 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 and is a more consistent approach with that adopted in the private sector.
  • 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’ positions and it has been a welcome addition to the debate, especially given that it comes from such a reputable source.

Unfortunately however, it has disappeared in to something of a black hole, possibly overtaken by other more pressing global events. The proposals however need to be addressed by the SSAB and implemented by Government and LGPS as quickly as possible. The issues faced have been created by local government, LGPS and the admitted bodies and there needs to be a commitment to co-operatively finding solutions, and a desire to do it soon. Charities need to be vocal with their Funds and local authorities about the issues they face and get them to look to address them positively. Charities should also be working collectively and in conjunction with their representative bodies to make sure their voices are heard.

David Davison

Playing the waiting game

In our fast paced society no one really likes waiting for anything, however for those financial directors of charities participating in local government pension schemes in England & Wales I’m sure they wouldn’t mind waiting a bit longer for their valuation results given everything else going on around them.

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David Davison

LGPS Discretions

An issue often over-looked by employers participating in a Local Government Pension Schemes is that each admitted body is required to have a Discretions Policy in place.  This Policy must be published, kept under regular review, and a copy must be sent to the administering authority. Read more »

David Davison

Spence & Partners, the UK pensions actuaries and administration specialists, was awarded the Pension Consultant of the Year title for their ‘Spence Approach’* for defined benefit (DB) pension schemes at the 2016 Workplace Savings and Benefits Awards ceremony at London’s Royal Garden Hotel last night.

Spence were recognised amongst their peers for their work, most notably their innovative approach to Defined Benefit (DB) scheme management and the role they have played in helping schemes complete DB to DC pension transfer requests.

David Davison, Director at Spence & Partners, commented: “Having won the same award category at the Workplace Saving and Benefits awards last year, we are so proud and excited to have won again in 2016!

Workplace Saving and Benefits Awards 2016

Davison added: “Further advancements this year to our offering provides schemes with even greater integrated risk management and more confidence when making investment decisions. Ultimately schemes, no matter their size, can access a level of analysis and advice that is usually reserved for only the largest of schemes.  This gives trustees and sponsors the confidence to manage their schemes to a long term strategy whilst providing accurate benefits and information to member, which is of course their primary objective. We have further developments planned for this year which we believe will take the approach even further”.

David Davison

Taking the Strain

When faced with cost constraints, considering a reduction in staff is an obvious early consideration. However, for those employers with staff in LGPS great care needs to be taken as ‘strain costs’ imposed by the Fund could result in very significant payments, often well in excess of any salary savings made. So what do you need to look out for? Read more »

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