New ICAS Report makes recommendations for LGPS Reform

David Davison

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There is now a greater acceptance of the issues charities face through their participation in local government pension schemes however it has been difficult to identify the quantum of the problem and from there arrive at logical and implementable proposals for change…until now!

Over the past couple of years the Institute of Chartered Accountants in Scotland (ICAS) via its Pension Panel has been engaging with the Scottish Government and the Scottish Public Pension Agency (SPPA) to look to better understand the scope and impact of these issues to allow recommendations to be made.

Helpfully, following an initial engagement with Scottish Deputy First Minister John Swinney in the middle of 2015, he helpfully issued a communication to all Scottish LGPS at the end of October 2015 requesting that Funds did not push charities to insolvency as a result of their pension liabilities pending a review of the Regulations.

In addition at the same time he requested the Scottish Scheme Advisory Board (SSAB) to carry out research amongst the Scottish LGPS to look to identify the quantum of the problem. This research was carried out and delivered to SSAB mid 2016 although it was not released more widely until mid 2017. Following its publication ICAS have commented on the key findings and made some recommendations for change in a report issued on the 25th September 2017.

Whilst based on the research carried out on Scottish LGPS it is important to emphasise that this research and the resultant ICAS recommendations have a UK wide application.

Key findings from the SPPA Data Collection Exercise

  • All data supplied was as at 31 March 2017.
  • There were 530 employers with at least one active member. Of these 422 were admission bodies (covering both transferee and community admission bodies) of which 223 had no guarantor and so were at some point likely to be liable for a cessation payment. Of these 102 had 5 or fewer members where a cessation payment could be deemed to be payable in the short term.
  • Worryingly of the 102, 60 remain open to new members and are therefore building further liabilities. Of the 121 with no guarantor and more than 5 members 94 remained open to new members.
  • There are 41 employers at greatest risk as they have fewer than 5 members and are closed to new members which mean that a cessation is imminent.
  • The cessation deficit associated with the ‘at risk’ group of 41 was estimated to be in the region of £12m-£15m (i.e. and average of around £300,000 per body).
  • The total liabilities for the 223 admitted bodies with no guarantor were in excess of £350m and the cessation liabilities could be in excess of £150m.
  • The cessation position could be materially worse now given falls in gilts yields since 2014 which highlights the issue with the cessation basis being adopted.

A summary of the recommendations

  • Admitted bodies should not be burdened with gilts based cessation deficits for liabilities inherited from all public service bodies. It is wholly unreasonable for a member of staff to transfer from the Council, for example, and then have the admitted body pick up the cessation cost of liabilities built up while the individual worked at the Council.
  • The treatment of these inherited liabilities should be consistent across all LGPS Funds and should apply to all benefits transferred in from public bodies.
  • Organisations carrying out out-sourced arrangements for public bodies should have their pension liabilities dealt with on a ‘pass through’ basis with them being able to be transferred back to the public body at the end of any contractual term. This would avoid local authorities seeking to walk away from their liabilities, leaving them with the out-sourced contractor.
  • It should be compulsory for LGPS Funds to provide all admitted bodies with an annual update on their cessation amount.
  • The LGPS Regulations should be amended to prevent the automatic trigger of a cessation debt on the exit of the last exit member. This would allow employers to continue to pay contributions on an on-going basis and manage their contributions and ultimate exit.
  • LGPS should provide admitted bodies with greater flexibility in payment amount and term.
  • There should be a maximum level of prudence applied to cessation calculations with a gilts basis not being used as the default.
  • Where it is clear that an admitted body cannot afford to exit the scheme and settle a cessation debt they should be allowed to exit based upon affordability and a payment plan agreed.

Many of these measures have already been implemented in some Funds so the proposals are wholly achievable. There are however huge inconsistencies in the approach taken by Funds and everyone would benefit from having access to a consistent series of options. The report provides a good template and it’s now up to government to implement much needed change.

David Davison

Post by David Davison

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

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