The Institute of Chartered Accountants Scotland (ICAS) is urging the Scottish Government to act now to stop charities building up unaffordable pension liabilities in the Local Government Pension Scheme (LGPS). ICAS has set out recommendations in a new report to the Scottish Public Pensions Agency (SPPA). The report (below) has been welcomed by Edinburgh Voluntary Organisations’ Council.
The looming crisis is not a new one – back in 2014 the Scottish Government acknowledged: “A number of third sector organisations have indicated that their pension schemes have reported significant deficits. This is because the values of scheme assets has fallen at the same time as a combination of increased longevity of scheme members, low interest rates and lower than expected returns have contributed to a rise in the value of scheme liabilities. This results in organisations facing increased costs through the need to increase their pension contributions.”
The pensions time bomb remains a major concern for charities, many of which fear closure due to overwhelming liabilities.
Current practice means that charities must keep at least one employee within the Scheme to avoid triggering an expensive cessation (or exit) debt. Charities which do not have the funds to pay the cessation debt cannot leave the Scheme and are forced to remain, building up additional pension liabilities they cannot afford which threaten their future sustainability.
Charities also risk inadvertently triggering a cessation debt, for example, when their last employee in the Scheme retires. This leaves a charity’s trustees with a sudden unplanned for debt which could put their charity at immediate risk of collapse.
Christine Scott, Head of Charities and Pensions at ICAS said: “We believe that urgent action is required to reform LGPS to enable charities to exit the Scheme in a controlled and affordable manner. This is not only in the interests of the charities affected and their service users but also the Scheme funds and other employers. It cannot be in the public interest that the vulnerable people these charities serve risk losing access to those services in the event of an insolvency.
“It makes no sense for charities to keep building up pension liabilities beyond the point they are affordable and the longer the current situation persists the greater the financial impact will be when debts finally crystallise.”
ICAS has been actively discussing this issue with Scottish Government for several years and encouraged the commissioning of research to identify the extent of the problem: research was carried out by SPPA in mid-2016 and its findings are based on figures available as at 31 March 2014.
ICAS estimates that charities considered to be imminently ‘at risk’ of exiting the Scheme, as at 31 March 2014, had a cessation debt of between £10 million and £15 million. We would expect that the position today will have deteriorated with more charities being ‘at risk’ and the level of debt higher.
Key recommendations are that:
· LGPS (Scotland) Regulations 2014 should be amended to prevent the automatic trigger of a cessation debt on the exit of the last contributing employee. This would allow charities to participate in funds without building up further pension liabilities. They could then agree future ‘on-going’ funding with the LGPS fund, triggering an ultimate cessation debt when it is affordable.
· LGPS funds should provide greater flexibility in the payment terms offered when exit debts are triggered. While some progress has been made in providing charities with more flexibility on the payment of cessation debts, the approach is not consistent across the Scheme and the level of flexibility offered does not necessarily meet the needs of exiting employers.
· Cessation debts should be calculated on a more realistic basis, making them more affordable to charities. Charities paying a cessation debt are essentially being penalised by paying more than LGPS funds are likely to have to pay out to employees in retirement.
ICAS also makes recommendations around the treatment of historic liabilities inherited by charities and call for consistency of practice across all LGPS funds in Scotland. It believes increased representation for charities on the Scottish Scheme Advisory Board for LGPS could help achieve this.
Edinburgh’s voluntary sector umbrella organisation EVOC has welcomed the report, saying: “EVOC welcomes this report from ICAS (Institute of Chartered Accountants) and support their efforts to ensure that the application of pension scheme provisions do not impact unfairly and adversely on Third Sector organisations.
“In many cases, the stability of charities is being undermined by the local authorities who rely on them to deliver essential services to the most vulnerable in our communities. However, the LGPS is not the only pension scheme which threatens the stability of Third Sector organisations. The Scottish Government must consider all pension debt issues which have the potential to impact on organisations unfairly.”
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