Pensions, Quango’s, and Vietnamese rat farming – the law of unintended consequences

David Davison

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In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats!!

The Government has announced a huge cull of quangos in a move it says is aimed at improving accountability as well as meeting deficit reduction objectives. Whilst I don’t expect this particular cull to result in the establishment of quango farms in the home counties, it may well have equally unintended consequences as I doubt what could be very significant pensions implications have been properly considered. These implications may well threaten the future solvency of some organisations not directly mentioned, and only loosely connected, and dwarf any potential financial savings expected.

The question of proper research and consideration has been widely raised post the announcement. Given the Governments inability to provide indicative cost savings at the point of the announcement and their indicative timescale for these being a couple of weeks hence, in addition to the relatively short timescale over which the review has been carried out, it does seem unlikely that all the possible issues will have been identified and their implications fully thought through.

The Government reviewed 901 bodies (679 quangos and 222 other statutory bodies) and decided to abolish 192 with 118 to be merged, the future of some bodies still under consideration and 380 retained. Quangos – “quasi-autonomous non-governmental organisations” – are arm’s length bodies funded by Whitehall departments but not run by them. They are advisory bodies, consumer watchdogs or organisations carrying out public services.

A Public Bodies Bill is to be introduced to give Government departments the power to cut or change the functions of bodies set up under statute. The legislation will also mean that the power is in place to abolish quangos in future.

The above table summarises the position.

The proposed changes have potentially very significant pension implications, not only for the organisations directly affected, but also for those which have an associated pensions link to them. For example, many of these organisations participate in multi-employer pension schemes, such as the local government pension scheme (“LGPS”) or other similar arrangements. Establishing exactly what those implications are and the parties potentially affected by them may prove difficult.

Multi-employer schemes are pension schemes where an employer participates under a single scheme umbrella along with a number of similar or connected bodies. These schemes are usually established on what is termed a ‘last man standing basis’. If any organisation ceases to participate in such a scheme this usually triggers some form of termination payment or “cessation debt”, which can be significant – many times any liability shown in an accounting or funding measure. Where an organisation is unable to meet the termination payment the cost of funding their liabilities passes to the other scheme participants.

Such a payment is likely to be triggered where an organisation ceases to exist or where that body changes its organisational status. The level of ‘cessation debt’ applicable is likely to be many times the size of the organisation’s assets, particularly in the case of quangos which are unlikely to hold substantial amounts of free reserves. Should any of these organisations cease to exist or change status it is likely they will have insufficient resources to cover their liabilities which means that any shortfall will need to be picked up by the other organisations participating in the same scheme. Such an event is likely to have many participants consulting their legal advisers to identify if any of this liability can reasonably be allocated elsewhere, such as where any cross-guarantee exists with another organisation.

In the case of the LGPS any increased liability is likely to be less noticeable and dramatic as the quangos are mostly smaller employers, particularly in comparison to large local government departments. In such a case any shortfall would in all likelihood be spread across a large number of scheme participants and probably spread over a reasonable period of time with the vast majority attributable to the largest participants, likely to be the local authorities. Any increase in costs, therefore, would be likely to be relatively modest for smaller participants though, no doubt, still unwelcome. Equally unwelcome news for local authority tax payers as they’ll effectively foot much of the bill.

However, the impact could be more dramatic in other schemes where the quangos constitute a major proportion of the participants or are responsible for a major share of the liabilities. Such cases could well result in other smaller non-quango bodies being unable to meet the additional costs and therefore also being driven out of existence, either immediately or over the shorter term. This could have a dramatic impact on services not directly envisioned to be part of the review.

Bodies who participate in schemes with any of these quango organisations will not unreasonably be concerned by the potential implications and may want to consider what options are available to them. They should certainly be identifying if any such organisations participate in their scheme!!

Once again one of the most significant outcomes of the pursuit of cost savings may well be to increase costs in the short term and result in significant unintended consequences for organisations which may at first look appear to be unconnected to the abolition of a particular quango. Oh rats!!!!

David Davison

Post by David Davison

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