Hertfordshire LGPS employer agreement sidesteps cessation debt

Watford Community Housing, an association providing homes for lower-income families, had taken on up to 80 active members of the Hertfordshire LGPS fund at its creation in 2007 from Watford Borough Council.

However, the employer now has less than five active members on its staff. If the last active member were to leave the scheme, a cessation debt would be triggered, forcing WCH to pay the full £3m buyout cost of its liabilities.

Instead, the housing association, which plans to continue active accrual for its remaining members, has reached an agreement with Hertfordshire County Council and Watford to transfer its assets and liabilities to the council’s section of the scheme.

In return, WCH will pay any ongoing costs of membership for its staff, insulating Watford Borough Council from any increased expenses.

Agreement frees up resources

Paul Richmond, director of finance and resources at WCH, said: “A cessation payment of nearly £3m from WCH would have diverted much-needed funds away from our core activities of developing new homes, improving our existing assets, and the delivery of high-quality housing services.”

Cessation debts in multi-employer pension schemes have proved controversial as employers seek to reduce their pensions risk. The threat of a Section 75 bill, while good for security of member benefits, can force employers to continue building up liabilities they cannot afford. Pension costs were blamed for the insolvency of a Northern Irish charity in 2019.

A deferred debt arrangement was introduced for multi-employer schemes in 2017, but experts have said using this in practice can be tricky.

Issues remain with multi-employer regs

David Davison, a director and owner of Spence & Partners, said the move was “at last some common sense shown by a fund, it’s a start and hopefully a template for things to come in the future”.

He pointed out that WCH could have taken on huge accrued liabilities for any experienced former council staff it transferred in 2007, which may only have been funded to 100 per cent of a transfer basis, similar to the ongoing costs of funding.

If WCH had opted to exit the scheme, or its last active member had left service, the debt would instead be valued against the steeper gilts-based cost of buyout.

Mr Davison called this mismatch “wholly inequitable”, leaving employers at the mercy of councils’ good will “as they cannot be forced to do so by the regulation”.

He welcomed the agreement reached with WCH, and noted that come councils are now providing contractors with guarantees that they will do the same.

He said that a preferable solution would be to amend cessation debt legislation so that a buyout debt is not triggered for liabilities that have not been accrued under the employer leaving the scheme.