Posts Tagged ‘LGPS’

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 chris.darby.2@aonhewitt.com.

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
£000
Organisation specific assumptions
£000
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

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. Read more »

David Davison

I’m often asked to explain why contractors have finished up with a substantial bill payable to an LGPS at the end of an out-sourced contract. I’ve therefore compiled this very simplistic worked example to highlight the issues contractors face. The figures are for representative purposes only and are not intended to be either detailed or LGPS liability specific. Read more »

David Davison

We are delighted at Spence to be able to support a further two publications launched over the last week.

  • The 4th Edition of Charity Finance Group (‘CFG’) “Navigating the Charity Pensions Maze” was published in London on Thursday 23rd March. Spence were pleased to sponsor this invaluable publication and our Director and Head of our Charities Practice, David Davison, provided technical input on the Guide content. The Guide contains an excellent section on “Navigating the Local Government Scheme” compiled by leading legal firm Charles Russell Speechlys. This covers the benefits and risks of membership and provides a list of helpful questions charities should be asking about their participation. The CFG accompanying blog can be found here.
  • Leading representative body the Pension & Long Term Savings Association (‘PLSA’), formerly the NAPF, have launched the third of their guides covering Best Practice for Employers in LGPS with David Davison again providing technical input on the content. This was launched on the 28th March and a link to the launch information can be found here.

We believe these documents, and those published previously, will provide an excellent resource for charity trustees and senior personnel to assist them in dealing with the issues associated with LGPS membership.

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