Some charitable organisations may be sleepwalking into a charity pension financial time bomb if they participate in the Local Government Pension Scheme (LGPS).
The scheme provides charity staff pension security at lower employer cost by providing economies of scale through pooled pension resources, but the defined benefit nature of these schemes carries a significant financial sting if ‘cessation’ occurs. Although the pension benefits for staff are defined, the costs to the employer are not. Employer financial liabilities extend to current employees and those who have accrued benefits historically and left employment, as well as those in retirement. Whilst the headline funding rate shows LGPS as fully funded, charities own a proportionate share of liabilities, meaning additional deficit recovery contributions are required to cover past service debt.
However, the term ‘cessation’ should strike fear. This is when the last active member of the scheme leaves and triggers a debt on withdrawal requiring the charity to buy themselves out of the scheme at a significantly higher cost than the ongoing deficit. The expense of a cessation payment may also be inadvertently triggered by restructuring or mergers. Cessation is calculated on a ‘gilts basis’. This uses much more prudent assumptions to the charities’ liabilities, increasing the cost substantially against the liability cost on an ‘ongoing basis’. There active members are reducing in both numbers and time to retirement, LGPS will eventually switch charities to cessation funding, meaning a considerable increase to annual pension costs. The aim of this switch is for LGPS to recoup the cost of full cessation ahead of it happening. Currently, there is also little consistency in the treatment of admitted bodies and it is a postcode lottery as to how charities will be treated.
A double-edged sword?
Whilst charitable bodies have options to control future liabilities, they are severely limited compared to other multi-employer schemes. Where a charity decides to stop actively participating in LGPS they trigger the requirement to pay the cessation debt now – an unaffordable route for most and the majority have no option other than continuing to participate in the scheme, thereby increasing the liabilities the charity will ultimately have to pay in the future. Pension issues present a major headache, particularly because organisations are facing several other issues including reductions in funding and diverting much needed income to cover cessation debts, which could be used elsewhere. As a matter of good governance, charity trustee boards should assess and be fully aware of the financial cost for which they are liable, when they may be due for payment, and consider any options which may be open to limit future financial impact.
Whilst there has been significant lobbying, the soon-to-be published 2018 regulations could be a missed opportunity after feedback from the recent consultation exercise highlighted that proposed changes fall well short of what is required to save many of the charities caught up in the LGPS issues.
Now, our advice is three-fold:
- Don’t bury your head in the sand – not addressing pension issues will create significant time and cash flow problems.
- Get fully up to speed – trustee boards should be fully aware of pension liabilities they have accrued and the potential additional associated costs they are liable for.
- Give it a high priority – good governance of a charity means that pensions should be high on any charity agenda and a watching brief should be regularly undertaken.
If your charity is affected by pension issues contact Gordon Birrell, Director at Chiene + Tait Financial Planning at firstname.lastname@example.org.