The Scottish Government has the power to save charities facing huge Local Government Pension Scheme debts
Scottish charities with just one employee left in the Local Government Pension Scheme (LGPS) are in imminent danger of hefty bills that could force some to close.
The Scottish Government, however, has the power to protect charities from debillitating pension debt bills and help put a stop to charities building up unaffordable pension liabilities, according to the Institute of Chartered Accountants Scotland (ICAS).
It is calling for the government to act now and follow the recommendations in its new report to the Scottish Public Pensions Agency (SPPA).
Current practice means charities that have traditionally been part of an LGPS must keep at least one employee within the scheme to avoid triggering an expensive cessation - exit - debt.
Organisations 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 and threatening their future sustainability.
They are also at risk of 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.
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. It stated this week that it expects the position today to have deteriorated with more charities being at risk and the level of debt higher.
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 is recommending 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.
It also recommends LGPS funds provide greater flexibility in the payment terms offered when exit debts are triggered.
Also, cessation debts should be calculated on a more realistic basis, making them more affordable to charities.
ICAS states that 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.
Scott added: “We also make recommendations around the treatment of historic liabilities inherited by charities and call for consistency of practice across all LGPS funds in Scotland.
“We believe increased representation for charities on the Scottish Scheme Advisory Board for LGPS could help achieve this.”
