Posts by David

David Davison

David Davison

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

The Security Obsession

In an earlier bulletin entitled ‘The Cessation Plot thickens’ I highlighted something of an anomaly in LGPS practice around security which I’d like to explore a bit further.

Firstly, I will consider an example of an admitted body looking to close off to accrual to better manage risk. Prior to doing this let’s assume that the organisation has £1m of accrued liabilities and £800,000 of assets covering them so a deficit of £200,000. The organisation is building further liabilities of £50,000 a year. Contributions for these new liabilities are £20,000 a year so each year the net position is worsening by £30,000 (excluding any investment return).

As an active employer the Fund has not taken any security so the Fund and therefore other participating employers are exposed to additional risk as liabilities continue to build.

If the admitted body was permitted to close to future accrual of benefits the accrued benefits are no worse pre and post the change (they will likely be lower afterwards if the link to salary on past benefits is removed), so why should security be required when none was previously in place. In addition a proportion of the contributions which were being used to build additional benefits in the Fund could be used to pay down the existing benefits rather than build up new ones. Let’s assume some of the £20,000 is needed to buy replacement benefits in another scheme so only £15,000 is available as a contribution. This will therefore reduce the deficit over time thereby reducing the risk to the Fund. This can only be good for all concerned and further supportive of the view that no security is needed.

So, why is there an obsession for Funds to get access to security on scheme change? It’s probably because they’re using it as an excuse to do so! A bit of a reality check is needed.

It’s potentially reasonable for Funds to look for security if some additional flexibility is being offered, such as access to a higher risk investment fund where the deficit risk could increase but without this the default position should be that additional security should not be necessary.

So if you’re being pushed for security by a Fund you may need to ask a few more questions, especially as any arrangement of this type is likely to be time consuming and expensive to arrange.

In my view there should be clear and consistent guidelines which Funds employ in relation to the provision of security. Some Funds are adopting a more pragmatic and indeed enlightened approach to the issue of security and it can only be hoped that others will begin to follow suit, especially if admitted bodies ask the right questions.

David Davison

As the government announces changes to pensions regulations, David Davison explains what these mean for charities.

They say that good things come to those who wait but I suppose that depends on how long you have to wait. I’m certainly delighted after around 10 years of campaigning that it looks like finally the section 75 regulations relating to multi-employer defined benefit pension schemes (MEDBS), which have so negatively impacted on charities over many years, are to be revised.

The problem which many charities in these schemes faced was that the further build up of benefits could not be stopped without triggering an unaffordable cessation debt, therefore charities were trapped in schemes forced to continue to fund for ever rising liabilities as they couldn’t afford to exit. This was wholly inconsistent with the options available in other UK defined benefit pension schemes.

At the end of February, the Department for Work and Pensions (DWP) issued the The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 with the expectation that these new regulations will be in place from 6 April 2018.

Key proposals

The regulations are a response to consultation carried out In April 2017 and the proposals comment on the findings of the consultation and how the government has chosen to respond.

The key proposal is the introduction of the Deferred Debt Arrangement (DDA). This will allow employers in MEDBS, whose only change is to cease to employ active members in a scheme, to retain an on-going commitment to the scheme rather than a cessation debt automatically being triggered.

It is envisaged that future contributions would be set on an on-going and not cessation basis similar to what would be the position in a standalone scheme or in the event that the scheme as a whole ceased accrual. This should offer charities really significant additional flexibility allowing them to control risk in an affordable way while focusing resource on paying down liabilities already built up rather than building further amounts.

In entering in to a DDA employers would continue to have all the same funding and administration obligations to the scheme as was the case prior to the agreement which will protect member benefits and indeed other employers.

‘The devil will be in the detail’

I don’t for a minute expect this to be the end of the story as we of course need to see how things play out in practice. As is ever the case, the devil will be in the detail, and we need to see how individual schemes react to the new flexibility and whether they seek to embrace it or look to put up barriers to implementing it.

There undoubtedly seems to be widespread consensus that change in this area is long overdue and along with these changes we’ll shortly witness similar changes to Local Government Pension Scheme (LGPS) regulation in Scotland and a review of Tier 3 employers in LGPS in England and Wales which will hopefully result in increased flexibility in these schemes as well.

Undoubtedly however this is a huge step forward and one can only hope the opportunity will be embraced by scheme trustees and employers alike.

If you want to discuss any issue raised in this article please feel free to get in touch. You can email me on or give me a call on 0141 331 9942

This article was original publish on Civil Society website. You can read the original article here.

David Davison

The LGPS Scheme Advisory Board (SAB) is seeking the input of charities at a meeting in Birmingham on 28th February 2018. The SAB was established to encourage best practice, increase transparency and coordinate technical and standards issues.

It is currently undertaking a review of Tier 3 employers in the LGPS – details of the project can be viewed here. Tier 3 employers are all those with no tax-payer backing (i.e. colleges, universities, housing associations, charities and any admission bodies with no guarantee from a Council, academy or other tax-payer backed employer).

The aims of the exercise are to identify:

  • the duties, benefits, issues and challenges for LGPS funds, Tier 3 employers and their scheme members with regard to their participation in the LGPS.
  • options for change that would improve the funding, administration, participation and member experience with regard to Tier 3 employers.

As part of this exercise it’s vital that charities get their voices heard. A key element of this project therefore is to gather information and to facilitate this a listening meeting has been set up at 2pm on Wednesday 28th February 2018 at Colmore Gate, 2 Colmore Row, Birmingham, B3 2QD. The meeting will be an informal discussion and provide you with the opportunity to ensure your views are heard and taken into consideration as part of this review of the LGPS.

If you are interested in attending please contact Chris Darby as soon as possible at

This is a unique opportunity to have your voice heard and facilitate the change that is needed within LGPS. Hopefully the content I have provided in previous Bulletins from ICAS will help everyone with content.

David Davison

It’s coming up to that time of year when participants in LGPS will be preparing for their year end accounting disclosures under FRS 102. The norm is that the Fund advisers provide an indicative set of assumptions, these receive a cursory glance, you await the results of your report at some time around May and then have this incorporated in your accounts.

Simple….but wait!

Did you realise that it is the Directors /Charity Trustees who have responsibility for these disclosure assumptions and not the Fund actuary?  You can therefore chose to use a different set of assumptions if those are more suitable for you and bearing in mind that one set of global assumptions issued by the Fund actuary can’t be specific to each employer, this is probably something worth considering, especially if your balance sheet position is important.

You may well be surprised by just how much of a difference small changes in the assumptions can make to your liabilities and therefore your deficit and balance sheet position.

I would therefore encourage employers already disclosing an LGPS pension liability to consider the assumptions used and whether or not they are appropriate.

The table below shows the potential impact of varying the assumptions used to calculate the FRS 102 liability.  Please note this will vary for each scheme and the figures below are provided as an example only.

Change in assumption Change in liability
+0.1% p.a. discount rate -2%
-0.1% p.a. inflation -2%
-0.5% p.a. salary increases -1%

Indicative results showing the impact on deficit and balance sheet position are shown below.

‘Standard’ assumptions
Organisation specific assumptions
Assets 2,000 2,000
Liabilities 3,000 2,850
Deficit 1,000 850

So a small change of 2% in liabilities as in this case could reduce the deficit by 15% and improve the balance sheet position by £159,000.

As you can see therefore, for organisations participating in LGPS, it is well worth considering the use of bespoke assumptions, particularly if you are looking to manage your balance sheet. If you would like an indication of how changes could have impacted your 2017 disclosures we would be happy to provide these.

If you are considering a change, you need to consider this now as Funds usually require some advance notice that a different process will be used. We provide this service for many of our clients so don’t hesitate to contact us if you need more information.

David Davison

Hope springs eternal

In past bulletins I have highlighted the lunacy of organisations in LGPS Funds being forced to continue to build pension liabilities beyond the point where they are affordable. Organisations are stuck, continuing to build more and more benefits for their staff, focussing contributions on new benefits rather than looking to pay down the legacy liabilities they’ve already built up.

Organisations have the Hobson’s choice of an unaffordable exit debt or continuing accrual driven by LGPS Regulations which are patently not fit for purpose.

At last there seems to be a glimmer of hope that the problem has finally been recognised and an acceptance that these Regulations need to be changed to better protect scheme employers as a whole, and indeed the Funds themselves.

In a previous Bulletin, I highlighted the work ICAS in Scotland had undertaken to encourage Scottish Government to review the Regulations and, as a result of this the Scottish Public Pension Agency communicated a commitment to review the Regulations and issue a consultation with their proposals. True to their word a consultation was issued on 6 November 2017 with a closing date of 15 January 2018.

The consultation proposes material changes to Regulation 62 (equivalent to Regulation 64 in England & Wales) which would allow ‘exiting employers’ to cease building up future benefits but without the imposition of a gilts based cessation debt, something which is unaffordable for most. This would be via the use of a ‘suspension notice’ where Funds could agree to let employers continue to participate, effectively on an ‘on-going’ basis, with a continuing contribution commitment to the Fund. Such an approach would assist in dealing with this ‘Hobson’s choice.’

I greatly welcome the SPPA’s approach although the detail still, in my view, needs some refinement.

ICAS has provided a response to the consultation which highlights some issues and makes further practical proposals how these may be resolved.

I can only hope that the proposals are implemented (with some pragmatic amendments) and that England, Wales and Northern Ireland look to follow suit. It can only be in everyone’s interests.

David Davison

Fake News?

I was reading through an LGPS annual report for 2017 this week (I know, I get all the fun jobs I hear you cry!) and was struck by a comment about the scheme membership continuing to grow and linking that to the health of the scheme and it’s relative attractiveness. This ‘positive spin’ wasn’t wholly in line with my experience so I decided to do a bit of digging to see if the statements actually held water.

Trawling through some old scheme records I identified that the scheme membership had indeed grown by about 50% over the 10 years to 2017. However, when you looked a bit more closely the increases were driven more by rising numbers of deferred members, which had more than doubled. The active membership had only increased by about 29% over the period.

So this meant that the active members, i.e. those actually contributing to the scheme, had fallen as a percentage of overall membership from over 52% in 2007 to less than 46% by 2017.

Over approximately the same period the pensionable salary roll for active members had increased by about 26% with deferred pensions increasing by around 80% and pensions in payment by over 88%.

This led me to look at a few other LGPS reports and the position is broadly consistent, demonstrating something of a trend.

So what this means is that the salary increase and active membership numbers have increased by a relatively consistent amount so the future accruing liabilities are broadly consistent. However it does mean that proportionately there’s a smaller number of those funding any deficit contributions related to deferred and pensioner members and paying for the costs of running the scheme.

So the picture isn’t quite a rosy as the statement would lead you to believe. It’s also a position that’s not wholly surprising.

Given that public sector pay rises were frozen for two years from 2010 and then 1% until this year the average annual salary rise in the public sector over the last seven years has been around 1.5%.

However, CPI over the same period has been 2.3% a year. So active member benefits (linked to salary have been going up at a significantly lower rate over the period than the increases on deferred benefits and for pensioners.

However, this isn’t the whole story. In 2014 in England, Wales & Northern Ireland and 2015 in Scotland the LGPS Scheme moved from a final salary basis to a CARE basis so this means that active participants are likely to have benefitted from higher increases on their pension benefits accrued after this date than they have their salaries, and this on a higher accruing figure (i.e. 1/49th per annum vs the previous 1/60th). So while salary benefits may have been losing value in real terms that’s not wholly the position in relation to pension benefits. A ‘healthy’ position for individuals but possibly not quite so healthy for the Funds! If we are to see salaries begin to rise in the public sector over the next few years then this will be something of a ‘double whammy’ for funds.

So, the claim of materially reduced costs as a result of the 2014/15 changes has proven to be something of a con, and indeed something that many admitted bodies will have witnessed first hand.

You may therefore not want to take the healthiness of your LGPS scheme funding from Fund comments about the growth of the membership as things are far from as simple, or indeed as positive, as suggested.

David Davison

An Unwelcome Inheritance

Mostly when people are told they have an inheritance it’s good news. A long lost relative or friend has bequeathed some money to you which opens up the opportunity to do all (or at least some) of those expensive items on the bucket list. Unfortunately an inheritance in an Local Government Pension Scheme (LGPS) is usually every bit as much of a surprise and shock, but far from as welcome for the recipient.

Many organisations, having become a participant in the LGPS were blindly unaware that to do so meant that they automatically inherited all the past liabilities for any staff transferring to or continuing with the organisation. Frequently this can mean that charities inherit hundreds of thousands of pounds of liabilities and in some cases many millions.

This anomaly arises because LGPS is unable to identify and allocate past service liabilities between employers, apparently only being able to allocate all of the liabilities to the latest employer. This is undoubtedly incredibly unfair as it means local authorities can deftly transfer the funding risk to an unsuspecting charity. Even where guarantees are provided tend only to protect charities on insolvency and not on voluntary exit or on increases in contributions.

The approach used by the Fund (in most but not all cases) notionally assesses the liabilities as being fully funded at outset so even if the funding level is only 90%, for example, it is assumed to be 100%. However this is far from a perfect solution for a number of reasons:-

    • The value of these liabilities will vary over time. If a further shortfall arises the funding costs for this will have to be picked up the new employer in full even though they did not employ these individuals at the time they accrued the benefits.
    • Where liabilities should have been notionally uprated frequently this has not been actually carried out or the exact terms have been lost ‘in the mists of time”.
    • Even if the benefits were fully funded this would have been on an on-going basis and not on a cessation basis. This means that on an ultimate exit the latest employer would pay a cessation debt on all these previously accrued benefits.
    • Should members benefits be subject to strain costs such as on redundancy or ill health early retirement these additional costs would have to be met in full by the latest employer.

These issues can come in to sharp focus where the latest employer has been admitted as part of an out-sourcing exercise. Procurers can inherit past service liabilities which dwarf any future service benefit which can be accrued over the term of the contract and become responsible for variations in the value of these liabilities over the contract duration and at the contract end date. Attempting to deal with these issues, usually very imperfectly, is achieved via contract negotiation and terms which again adds unnecessary complexity, inconsistency and frustration. A worked example showing the issues is available here.

Funds should really be dealing with this issue properly by segregating liabilities, as is the case in most other large multi-employer schemes. The costs related to past service liabilities would be fairly retained with the employer who accrued them with future service only being the responsibility of the new employer.

Frustratingly many Funds continue to deny the issue of inherited liabilities. It is totally inequitable to expect a small charity to pick up a cessation liability for benefits they previously inherited from a public sector body on an on-going basis, or even in many cases a funding basis well below this. I’m surprised more fuss hasn’t been made of this!!

Some Funds however have sensibly identified this and looked to deal with it fairly and I can only hope that all others will follow. Indeed these liabilities should just be re-allocated to public sector ownership, which is totally possible, and would mean that the Fund has them guaranteed with no cessation debt requiring to be paid. I can only think the reason for not doing this is the LA’s know they’ve dodged these liabilities and don’t want them back!!

The recent ICAS report made recommendations how this issue could and should be addressed. I would recommend that any charity that have witnessed significant contribution increases or have been provided with a cessation debt consider this issue and have it properly investigated as it could have a material impact and it seems an issue which when outlined would not be easy for funds to reject.


David Davison

A Landmark Judgement

The objective of bringing LGPS funds more in line with all other UK pension schemes and forcing them to invest in the best interests of members came a little closer after the government suffered a major defeat in the High Court at the end of June.

The government had issued guidance in September 2016 requiring LGPS funds to have environmental, social and governance (ESG) policies but added a requirement that funds could not “pursue policies that are contrary to UK foreign policy and UK defence policy”.

The Palestine Solidarity Campaign (PSC) launched a bid in the courts to overturn the regulations via a judicial review. It contended that the government had acted outside its powers and it was “lacking in certainty”. It also cited Article 18.4 of the EU’s directive on the Activities and Supervision of Institutions for Occupational Pension Provision (IORP) that states “member states shall not subject the investment decisions of an institution…….to any kind of prior approval or systematic notification requirements”.

Judge Sir Ross Cranston only agreed with the first argument citing that he couldn’t see “how the secretary of state had acted for a pensions’ purpose”. He therefore granted the judicial review.

A spokesman for DCLG said that the government would consider whether to appeal.

While the judgement was broadly welcomed it may not be quite the end of the issue as trade unions encourage the government to implement EU IORP directive into LGPS.

The judgement does however mean that Funds will have more freedom to take positions on ethical investment focussed wholly on the best interests of scheme members which must be a benefit.

David Davison

In April this year the DWP launched the snappily titled public consultation ‘The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017’. The consultation, which closed on the 18th May, was looking to make suggestions to deal with the perennial issue of Section 75 debts. A Section 75 debt triggers when an employer ceases to have active employees in a multi-employer scheme while other employers still do.

All very interesting (or not) but what does this have to do with LGPS you may ask, especially given neither the Section 75 legislation nor the DWP consultation actually cover LGPS? However while Section 75 legislation may not specifically apply to LGPS the principles on exit / cessation and the issues the consultation is looking to address are pretty much the same. In fact some of the specifics of LGPS actually make the options for employers even more restrictive than in other ME schemes.

The consistent issue is that neither multi-employer defined benefit schemes (MEDBS) or LGPS have a mechanism to allow participants to cease building up benefits for all members without automatically trggering a debt at that point. This is a mechanism available in standalone and segmented multi-employer schemes allowing employers and trustees to more effectively manage risk. The lack of this option encourages participants to continue to build up additional benefits for staff way beyond the point where they are affordable, placing their very existence at risk, reducing the covenant of member benefits and risking placing an additional burden on other organisations who participate in the scheme. Legislation as it sits at the moment not only limits an employer’s ability to manage this risk but also ties the hands of those running the pension scheme.

Many employers are now facing a cliff edge as their membership numbers fall. Many recognised the risk and associated costs of DB provision and closed their schemes to new entrants. This just makes a movement towards ultimate cessation inevitable as eventually they will run out of active members. Research recently carried out by the Scottish Government in relation to Scottish LGPS has highlighted this wall of risk and Funds throughout the rest of the UK will be no different.

A way that many private sector MEDBS have looked to deal with the issue is either to close to future accrual for all employers simultaneously or to add a defined contribution scheme under the same trust as the defined benefit scheme thereby allowing employers to have active participation but to have stopped accruing further DB liabilities. Unfortunately neither of these solutions is open to LGPS employers.

In one of my previous Bulletins ‘An Alternative Approach’ I highlighted the potential impact of the timing of this debt trigger and how this was effectively a one-sided equation stacked in favour of the Fund and unfortunately an equation that many admitted bodies are unaware of until it’s too late.

The DWP Consultation sought comments on a potential solution called a deferred debt arrangement (‘DDA’) which would allow employers to cease further DB benefit accrual and continue to fund the scheme without triggering the S75 debt. Employers would retain all the same obligations towards the debt and scheme to protect members and the Trustees but it would permit a more practical and orderly exit from DB accrual.

There does seem to be consensus at this stage that something does need to be done, though some variation in the mechanism to achieve it. I can only hope that we get some practical and workable proposals out of the consultation and that it is more widely applied covering LGPS. Action needs to be taken now but given our current political environment and the Governmental focus on Brexit it would be a brave man to predict we will see anything substantive in terms of legislation in the short term, let alone seeing it extended to LGPS, even though in my view it quite clearly should be.

David Davison

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.

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