David Davison urges charities that participate in local goverment pension schemes to respond to the Department for Communities and Local Government's consultation. 

Charities participating in local government pension schemes (LGPS) have a great opportunity to provide feedback to the Department for Communities and Local Government (DCLG) on changes they would like to see to the operation of these schemes.

The consultation is open until 31 January 2015.

Many charities I’m aware of are trapped in these schemes, unable to afford the exit cost and therefore forced to continue building up further liabilities which they know they will never be able to pay. Many organisations are looking to sensibly manage their affairs but LGPS have been totally unresponsive to the issues organisations face – “problem, what problem?”

Schemes have been sleeping on the job, failing to recognise the tidal wave coming in their direction through allowing organisations to participate well beyond the point where this can be justified and without offering any degree of flexibility. The solution has been to continue to kick the problem down the road whilst pushing for higher and higher contributions after each valuation. Other schemes have been alive to the issues and much more proactive in offering flexible funding approaches, scheme closure and revised future accrual options.

The driver for the consultation, “to better protect local tax payers where there is a risk they will have to foot the bill for employers who leave the scheme” is laudable, if a little late. There needs to be a will to change and scheme participants need to make sure that Schemes hear about their issues and are forced to confront them.

There are some really simple solutions which will undoubtedly make a really material impact in this area.

• LGPS are not subject to Section 75 of the Pensions Act and therefore do not need to force a cessation debt on participants should they wish to cease to accrue future liabilities.
• LGPS are not like other multi-employer pension schemes. They will not wind-up and therefore there is no reason for them to apply a cessation calculation which is based upon an insurance company type buyout cost (which can lead to liabilities which are double the typical ongoing reserving requirements). They can apply an element of prudence but the current basis is excessive.
• The priority for LGPS should be to have the employer ceasing accrual reach a fully funded position on an on-going basis as quickly as possible. Any prudent funding element over and above this should be funded on a much more flexible basis, potentially using a term similar to the existing past service funding period or based upon the average working lifetime of the remaining members.
• LGPS should not be permitted to transfer unconnected past service liabilities to new employers, particularly when those past service liabilities relate to public sector employees. Service should be split across employers based upon where it is accrued and any cessation funding should split on the same basis.
• LGPS should adopt consistent principles and approach across all the schemes. This will make it easier for participants to know where they stand and will undoubtedly save on advisory costs.
• Pension scheme costs should be transparent well before the point at which organisations are asked to sign up to out-sourced public service contracts.

Primarily there needs to be a recognition that just because you are collecting contributions now doesn’t mean you aren’t building up problems for yourself in the future and that these problems increase the longer action is delayed.

Admitted bodies have a chance to get their voice heard and this opportunity doesn’t come along very often.  I strongly encourage charities to make sure DCLG is made aware of the issues organisations face.