Many UK charities will have received some unwelcome news in the opening months of 2015 from their local government pension providers. While the funding position overall appears to have deteriorated, the change is not considered material enough to alter the underlying contribution rates. However, there is a sting in the tail for smaller charities in particular.
Many small charities, recognising the issue they face from their defined-benefit liabilities, have looked to limit these by closing membership to new staff. Many will have wanted to go further by closing off all accrual, potentially redirecting any savings on future benefit costs. But despite this being an option for local government pension schemes, they have steadfastly refused to offer it.
Charities have instead been faced by the difficult choice of continuing to have staff participate in the scheme or settling their full cessation debt. This amount is usually unaffordable for most charities, and LGPS have been unwilling to provide charities with the flexibility required in terms of funding periods to make this a viable option.
It seems the LGPS would prefer charities to build up ever more unaffordable liabilities and simply employ the power of prayer. However, this strategy has a shelf life because participating charities gradually begin to run out of members and a larger cessation debt ultimately becomes payable. I struggle to understand why schemes continue to allow organisations to build up ever greater liabilities that they can’t afford. This cannot be in the interests of the organisation, the scheme or the taxpayer.
But clearly there is a cunning plan. The schemes are now targeting all charities that have five members or fewer and are looking to increase their contributions automatically to the cessation basis, payable over whatever is the remaining average period to retirement of the membership. So organisations will move from an ongoing funding basis, gradually or in some cases immediately, with substantially increased fixed contribution amounts. Schemes could see three-fold or more increases in contributions, similar to those witnessed last year within the LGPS in England.
As a result, some charities will continue to soldier on, paying ever higher contributions and accruing ever more liabilities until they reach the point of unaffordability. Unfortunately, some have reached that point already. So the schemes will have to decide if they are prepared to allow benefit build-up to cease and accept deficit contributions that the organisations can afford, or if they are going to reject these proposals and enforce a debt, ultimately driving these valuable community organisations into insolvency, with little if any recovery for the scheme and with all the associated chaos that such a result will entail.
The Department for Communities and Local Government concluded its consultation at the end of January for schemes in England, although clearly the issues should be consistent throughout the UK. The driver for that consultation – "to better protect local taxpayers where there is a risk they will have to foot the bill for employers who leave the scheme" – should provide a focus to address these issues.
Some simple solutions could make a significant impact, the key one being for schemes not to force a cessation debt on participants should they wish to cease to accrue future liabilities – or, if they do, to offer much more flexible terms.
Difficult decisions lie ahead for schemes and charity trustees.
David Davison is head of not-for-profit practice at the pensions firm Spence & Partners