Insights

A new dawn for charities in Local Government Pension Schemes

Name: MHA
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Posted on: February 14th 2022 · read

David Davison of Spence and Partners, a leading expert in their Public Sector, Charities and Not-for-Profit practice, advises employers and third sector bodies on all aspects of multi-employer schemes. David has reported that there is a new dawn for charities in LGPS, as follows.

Charities have for a long time found themselves trapped in Local Government Pension Schemes, struggling to pay contributions and deal with ever increasing balance sheet liabilities whilst being unable to afford to exit their scheme. Thankfully help is now at hand.

New regulations were published in September 2020 which added new exit options, but each individual Fund needed to consult with their actuarial and legal advisers to formulate their rules and make them completely transparent for charity employers to follow. It’s taken a while for Funds to do that, but most are now completed, or Funds will work based on the likely outcome if they’re not. The new options available should offer employers much more affordable and flexible exit options and many charities are already utilising these.

The problem

When charities run out of contributing members or look to exit LGPS a cessation (exit) debt will be calculated. This is carried out on a ‘nil risk basis’ which means that the liabilities, and therefore any deficit, is much higher than on an ‘on-going’ or FRS102 accounting basis. Many third sector organisations therefore find themselves with the Hobson’s choice of continuing to build additional unaffordable liabilities or meeting an unaffordable exit payment. A number of organisations have recently found themselves driven into insolvency by the weight of their pension liabilities.

The new flexibilities

The new LGPS Regulations now formally provide two additional options:-

Debt Spreading Agreement (‘DSA’) – this allows exiting employers to enter into agreements with LGPS to fund any cessation debt due over a period of time. This would allow uncertain pension liabilities to be turned in to a stream of fixed payments to be set over an affordable agreed term.
Deferred Debt Agreements (‘DDA’) – this allows schemes to defer any exit payment and to permit the employer to carry on in the scheme on an on-going basis. The employer would retain all the same obligations to the scheme with future payments uncertain. However, immediate costs are likely to be lower and therefore much more affordable, allowing employers to better manage the risk of future benefits building up. Valuations would be carried out regularly and contributions adjusted if necessary.

These changes could be hugely welcome for many charities.

The process

The process being adopted looks broadly consistent across Funds:

To seek a DSA or DDA the charity should make a proposal to the Fund providing the reasons for the request and any supporting information.
The Administering Authority will then consider the request. The assessment will be primarily focussed on the employer covenant (ability to pay) and also any steps the employer can take to strengthen the covenant for the scheme, such as the provision of security or guarantees. The Fund is likely to commission covenant research from a financial specialist as part of the process.
There is then likely to be some discussion / negotiation around the terms of any arrangement covering the contributions, term and security arrangements.
Once a basis is agreed this will then be documented in a formal legal agreement.
This process is likely to take between three and six months when you add in charity Board and staff engagement.

Clearly the more challenging the financial circumstances which the charity finds itself in the more difficult any negotiation is likely to be. It has however been recognised, right back to the original consultation on the proposed changes, that even where an employer provides a weak covenant entering into some sort of agreement, which reduces future risk by stopping further accrual, this could be preferable to the status quo and provide greater protection for continuing employers. It cannot be in anyone’s interests to see employers continue to accrue liabilities well beyond the point they are affordable and then to continue to provide for further accrual.

Conclusion

Given the budgetary pressures charities are likely to be facing as we emerge from the Covid-19 pandemic, these changes represent a significant opportunity for organisations to manage a major financial risk. Charities should therefore engage with their professional advisers and Funds to consider what approach would best suit them.