Enlightened move by Lothian Pension Fund should be welcomed by charities

David Davison

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A change in practice by local government pension scheme Lothian Pension Fund (‘LPF’) outlined in a recent Bulletin has finally looked to rectify a long standing anomaly with pension schemes of this type.

Many charities joined LGPS as a result of outsourced arrangements from local authorities or other public bodies. These arrangements resulted in the transfer of staff from the local authority and allowed these staff to continue their pension provision.

Unfortunately Funds were unable to segregate the service for these individuals between the two employing bodies which meant that the later employer, usually a charity, inherited all the liabilities.

So what this meant was that we could have had an individual who’d worked for the Council for 30 years, transfers to the new organisation to continue performing the same job but the new employer becomes responsible for any shortfall in pension costs and potentially redundancy costs for the whole period of service. Hardly fair!!

What is even more of a problem is that these liabilities can move from being calculated on an on-going basis, effectively broadly the basis they were transferred on, to a much higher cessation basis, which effectively lands the new employer with a huge liability.

No one is denying that the individual remains entitled to these benefits in full but it is clearly inequitable to expect the new employer to pick up any more than their fair share of them.

LPF have thankfully recognised this and accepted that applying a cessation debt in these circumstances is unfair. They have therefore accepted that for these transfer organisations on exit from the Fund only an on-going liability can be levied. There could still be some variation in these figures from the date of admission to the date of actual settlement but the announcement represents a significant move which should be widely welcomed.

In addition LPF have confirmed that this change will apply for all liabilities for all employees of these affected bodies and not just those transferred, as it would be inefficient to commit resources to identifying the split of these liabilities in detail. This should for many to a great extent offset any movements in liabilities over the period outlined above.

Clearly this represents a significant change and one which surely must have implications for other administering authorities as if there is an acceptance that the prior approach is inequitable in this Fund it must be, de facto, inequitable in all similar funds. We await to see similar announcements from other LGPS.

From charities perspective they need to understand if this circumstance is likely to apply to them and put pressure on their administering authority to adopt the same approach. Should this then apply they need to seriously consider their future options and if they want to continue to participate in the Fund or if the change now brings an affordable exit within reach.

David Davison

Post by David Davison

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

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