Community admission bodies in the Scottish Local Government Pension Scheme are in the middle of a debt crisis, accountants have said, but ceasing accrual or exiting the LGPS risks triggering unmanageable cessation debt and driving admitted bodies into insolvency.
In 2015, Deputy First Minister John Swinney instructed the Scottish Public Pensions Agency to research the impact of cessation valuations on LGPS funds and contributing employers. In 2016, the SPPA published its Data Collection Exercise.
Almost anything one canimagine would be fairerand more sustainable
Ian Neale, Aries Insight
This week, the Institute of Chartered Accountants of Scotland responded with proposals including standardised changes to debt calculation methodology, improved admitted body representation on the LGPS (Scotland) Scheme Advisory Board, and amendments to the LGPS Regulations 2014.
Councils must take back their debt
Charities have been particularly exposed to high cessation debts. Participating bodies are currently forced to leave one active member in the scheme to avoid activating exit debt. Charities that cannot afford the debt are trapped within the LGPS and continue to build up unaffordable pension liabilities.
The SPPA’s report identified 41 participating employers at risk of falling into the cessation debt trap. David Davison, director at consultancy Spence & Partners, contended that this figure was a conservative estimate.
Councils that outsourced management to charities have placed significant duress on those bodies, according to Davison.
Using the example of outsourced leisure centre management, he said: “At the point [the leisure centre business] was set up, all the members who were working for the council previously move[d] to the charity that [had] been set up to manage the leisure services.”
He added: “The local government scheme can’t identify or split the liabilities between the council and the new charity, because they only recognise one employer.” The charities thus took on the pension debt that was previously the council's.
The ICAS paper proposed that all public sector outsourced liabilities should be treated on a “pass-through basis”. This would entail fixing an admission body’s employer contributions for staff engaged on a contract for the contract’s duration. The associated liabilities would be returned to the local authority when the contract ends.
Davison also speculated that two charities have already been declared insolvent as a result of LGPS cessation debt in Scotland.
Follow the Lothian way
The ICAS report proposed improved and consistent means of recording liabilities. It cited the Lothian Pension Fund, which calculates exit debt on an ongoing basis, instead of a cessation value calculated on a gilts only measurement.
Ian Neale, director at policy specialists Aries Insight, also suggested that up to two charities may have fallen victim to cessation debt, and said that “almost anything one can imagine would be fairer and more sustainable” than measuring debt on a cessation basis.
The Scottish government is still considering its response to the Data Collection Exercise. Neale said that the government’s plan, which will seek to defer these pension liabilities, will be important, but insufficient.
“What we need really is to get to a point where non-associated employers, in particular charities, can actually stop future accrual without triggering the employer debt,” he said.
But Catherine McFadyen, partner at consultancy Hymans Robertson, cautioned: “If there was going to be change, it would really only be if someone was prepared to act as guarantor to those liabilities in the fund after the charity goes.”
No end to liability build-up for charity schemes
Some of the worst-funded not-for-profit scheme sponsors are unable to cease future accrual or limit future membership as defined benefit affordability continues to pose a threat to the sector.
A Scottish government spokesperson said: “Following advice from SSAB the SPPA will shortly consult on changes to the scheme regulations which are intended to provide further flexibility for funds when dealing with third sector employers.”
Consider removing charities from the LGPS
According to ICAS, admission bodies are currently represented by a member of staff from a single employer on the SSAB board. The body has called for a minimum of two representatives on the board.
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Ensuring that charities are alive to the threat posed by cessation debt is a challenge in itself, according to Alan Eccles, partner at law firm Brodies: “We tend to see it, as the rules currently are, as an awareness challenge for charities to really understand how serious an issue this can be. Not everyone is fully aware of it.”
Legislative change remains the key to protecting admission bodies from insolvency through cessation debt. Failing this, Eccles suggested a more radical proposal.
“On one level, the way forward is just simply to take charities and similar bodies out,” he said.
