The Scottish Public Pensions Agency is looking to align exit debt rules for Scotland’s local government scheme with those now in force in England and Wales, to avoid pensions tipping more small LGPS employers into insolvency. What is happening next, and what is Northern Ireland doing? 

 

Back in 2016, Link In Craigmillar, a Scottish housing association, was liquidated after it could no longer afford the pension liabilities it was accumulating. In 2019, the insolvency of Northern Irish charity The Rural Development Council – originally set up as an arm’s length body – further highlighted the problem with cessation payments in the LGPS. 

 

While outsourcing might be well documented now, this was not the case when charities were brought in or set up to deliver some services for the local authorities in the late 1980s and early 1990s, meaning pension liabilities were transferred to charities on an ongoing funding basis. However, as soon as the charity seeks to pay off its liabilities, they are accounted for on a gilts basis, frequently making them unaffordable. 

 

 

The issue has been addressed with new regulations that came into force a year ago - but only for England and Wales. The new rules allow employers like leisure centres or housing associations to enter into a formal debt deferral arrangement or spread the payment of any exit debt that has already been crystallised. 

 

Scotland’s employers were, in 2018, given the option of a ‘suspension’, but this is not finding much resonance; it is seen as a technical and complex process. As a result, the SPPA is now considering moving to the same model as England and Wales.  

 

Earlier this year, it emailed administering authorities, seeking views on the existing rules for exiting employers, and asking whether they need any additional clarification to help them apply these - and whether authorities in Scotland should have the same flexibilities as are in force in England and Wales. 

 

A formal consultation has not been launched yet, as the SPPA agreed to take a step back before consulting to work through concerns raised by Scotland’s LGPS Scheme Advisory Board.  

 

Scotland’s SAB – which consists of employer and union representatives – “discovered that some employers had concerns regarding cost implications”, said partner at law firm MacRoberts, James Keith. 

While some funds have what he termed a “progressive” policy about how to account for exit debts, the largest two funds in Scotland "take a very commercial view on things, for them it’s about affordability” he observed. 

 

“The regulations give the actuary a massive amount of discretion about the funding basis. It's all about ‘having regard’,” Keith explained, which means the actuary is not obliged to ensure fairness. Charities are therefore “really at the behest of the local authority and any employers in it. And that’s a mischief,” he said. 

 

David Davison, a director at consultancy Spence & Partners, does not mince his words, accusing local authorities which insist on a gilts basis of profiting on the back of communities. 

 

“What funds are doing with housing associations is getting them to exit and pay these debts, that’s taking money out of the community,” he says. What is more, “if you have a £10m exit debt and put £10m in, it doesn’t actually improve the funding position of that employer, it gets spread across the scheme, all employers in the scheme benefit”, he notes. For Davison, a gilts basis is not required for a strong and ongoing employer like a local authority. 

 

Davison said part of the problem is “funds not getting their heads around” the reasons why it could be beneficial to let an employer leave - and run a closed scheme. 

“What they are not appreciating is if the [employer] has £20m of liabilities, if you don’t do anything, in 20 years it will have £60m liabilities. Whereas if you close the scheme, stop accruing and pay off the debt, in 10 years it will be overfunded by £10m or £15m on an ongoing basis, so the risk is actually reduced for the fund and the other employers,” he argued. 

 

 

While Scotland is expected to change its exit regulations, Davison sees the Northern Ireland Local Government Officers’ Superannuation Committee as the “outlier” which is “very much behind in terms of what it’s able to do”.  

 

The scheme has had a set of regulations since 2010, but Davison called these “pretty much unworkable”. 

 

Referring to these regulations, NILGOSC said that in general, an employer wishing to leave the scheme has a number of flexibility options which avoid an immediate debt. It said that these “have been successfully utilised by employers”, and that NILGOSC was the first LGPS scheme in the UK to introduce the measures, “which have since been emulated by England & Wales and Scotland”. 

 

Regulatory changes would need to go via Northern Ireland’s Department for Communities, and the devolved government said it is monitoring the developments in England and Wales. A DfC spokesperson said: “The Department is aware of the recent changes to LGPS legislation in England and Wales and is continuing [to] monitor the outworking of these changes.” 

 

 

To date, not much can be said about how the new flexibilities are being put into practice. "We’re in the early days of the process, there is an element of nervousness as we do the first few and funds understand what they are undertaking,” said Davison. 

 

However, a number of new cessation agreements are in train with a variety of funds, he added, and “there seems to be a desire by funds to utilise them”. He did not think that there would be signed agreements before the end of the year, expecting them in early 2022 at the earliest. 

 

The Local Government Scheme Advisory Board of England and Wales said it actively encourages administering authorities to make use of these flexibilities, where appropriate, taking into account the interests of the employer concerned and other employers within the fund. 

 

Bob Holloway, pensions secretary at the English and Welsh SAB, agreed however that with statutory guidance having only been provided in March, “it may be a little too early to get a real feel for how the flexibilities will be used in practice”. 

 

Holloway said that Scotland’s move to bring in the same regulations could happen soon: “We understand the consultation will be published in the next couple of months.” 

 

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