New flexible LGPS options offer valuable new alternatives to hard pressed Scottish charities
Charities in Scotland have long found themselves trapped in the Local Government Pension Scheme (LGPS) struggling to pay contributions and deal with ever increasing balance sheet liabilities through being unable to afford to exit scheme funds as the exit payment due was unaffordable.
At last an escape route may be possible.
On 3 May 2022 the Local Government Pension Scheme (Scotland) Regulations 2022 were laid before the Scottish Parliament and come in to force on the 1 June 2022, replicating changes already introduced in the LGPS in England & Wales in September 2020.
These new regulations introduce the concept of the Deferred Debt Agreement (DDA). This allows scheme funds to defer any exit payment and permit the employer to carry on participating in the scheme on an ‘on-going’ funding basis, but without any active members.
After many years of campaigning by ICAS, Scottish funders, Spence & Partners (on behalf of the charity sector), new Scottish LGPS Regulations are poised to make a real difference. ICAS would like to thank Lothian Pension Fund, Strathclyde Pension Fund and the Scottish Public Pensions Agency for listening and understanding the issues, and developing rules which will help many charities.
By remaining a part of the scheme the employer would continue to benefit from investment returns and favourable member movements which could reduce the ultimate cost of providing the benefits. The employer would retain all the same obligations to the scheme fund and the funding position will be volatile so charity employers will need to be able to manage changes in their funding position and potentially contributions.
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.
We have already seen some enlightened Scottish scheme funds recognise the issue which many charity trustee boards face and pre-empt the change in regulation by offering charity employers access to greater exit flexibility but it is none the less good to see these actions formalised and therefore available for use across all Scottish scheme funds.
Funds in Scotland are evolving and this is one of a number of changes we are witnessing which provide charity employers with increased flexibility:
- Cessation debts guaranteed for 90 days - Historically there has been an issue where an exit illustration has been provided but by the time the exiting employer has completed their consultation and actually exited, the amount of the deficit has deteriorated so much as to now make the exit unaffordable. This will avoid this issue by creating greater certainty for all parties.
- Changes to the exit valuation basis - We are witnessing the actuaries of some Scottish scheme funds adopt a different exit calculation basis. Historically, this has always been on a ‘nil risk’ gilts basis however actuaries have evolved to a probability of success basis which in most cases materially reduces the cessation debt and indeed for many employers makes it affordable. It is to be hoped that this more equitable approach will be adopted more consistently across Scottish scheme funds.
- Wider range of investment options available - Some scheme funds are considering widening the range of investment portfolios available to their employers which would allow them to target their specific membership profile more closely, and indeed provide lower risk and less volatile funding for those looking to exit on a DDA basis. This could create greater certainty of contributions with a much lower risk of material changes.
Where LGPS membership is presenting a charity with cost and risk challenges, the charity’s board can now consider reviewing the charity’s position in light of these new options.
David is a member of the ICAS Pensions Panel.