The Cessation Plot Thickens

David Davison

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In an earlier bulletin, I looked at why the current basis of cessation for admitted bodies in LGPS was causing problems and how the inconsistency of approaches taken by Funds meant that organisations struggled to understand their obligations and what steps were open to them to address the issues they face.  You can read the bulletin entitled ‘An alternative approach to cessation’ here.

In some work undertaken over the last few months I’ve identified that some Funding Strategy Statements (‘FSS’) revised over the last couple of years seem to suggest that some Funds are taking tentative steps to try to address the situation.

The FSS is the document compiled by Funds to set out their funding and contribution strategy in one place. In a number of these documents produced in 2016 and 2017 I’ve noticed the addition of the following phrase.

“As an alternative, where the ceasing Admission Body is continuing in business, the Fund at its absolute discretion reserves the right to enter in to an agreement with the ceasing Admission Body. Under this agreement the Fund would accept an appropriate alterative security to be held against any deficit, and would carry out the cessation valuation on an on-going basis: deficit recovery payments would be derived from this cessation debt. This approach would be monitored as part of each triennial valuation: the Fund reserves the right to revert to a “gilts based cessation basis” and seek immediate payment of any funding shortfall identified. The Administering Authority may need to seek legal advice in such cases, as the body would have no contributing members.”

This wording is usually also re-stated later in the document under additional flexibility relating to closed schemes suggesting that Funds will consider the option of running participation on a closed on-going basis for admitted bodies with no active members. This looks suspiciously like a deferred debt arrangement as outlined in my recent article on ‘The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017’.

Whilst I greatly welcome this additional flexibility provided under LGPS it is unfortunately symptomatic of the lack of consistency and transparency prevalent within Funds. I would question how many admitted bodies are aware of this option and what it entails. Now Funds might retort that admitted bodies can access the FSS, but are they likely to read a 40+ page document to identify this option without it being drawn to their attention – I somehow think not.

So, what questions does this addition raise?:-

  • Why is this logical provision not included in all LGPS FSS?
  • Why has this option not been more clearly communicated to admission bodies to encourage them to look at their options within their Fund?
  • Is there standard documentation and a streamlined process that can be followed to allow an assessment to be carried out?
  • In terms of security what does this look like and how much does it cost to put in place?
  • What should admission bodies do if they participate in a Fund without these provisions? LGPS Funds should be operating in a consistent way given that they are operating under consistent Regulations.
  • What happens if no security can be offered? Are organisations just encouraged to continue to participate to the point of insolvency? This is a particular annoyance for me in that it reflects the Funds’ obsession with security. On ceasing to employ active members, the risk of providing the benefits is identical the day before and the day after the last member leaves. However, future risk is reduced as there is no further accrual, so all contributions are focussed on paying down historic debt. Why then is there a need for additional security on an effectively reduced risk?

In reality I can’t help wondering just how many arrangements of this type have actually been completed and if it’s something that’s been added but with the hope that no-one will look any more closely at it.

At least the flexibility is there if people are aware of it and they can choose to engage with their Fund. I look forward to seeing how things develop in this area over the coming months.

David Davison

Post by David Davison

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

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