David Davison, director of actuarial practice at Spence and Partners, warns that charities in local government pension schemes should prepare for more funding pain

A seemingly mundane announcement about pension funding methodology by the London Pension Fund Authority (LPFA) is likely to have a major impact across the third sector.

While there are around 100 autonomous local government pension schemes (LGPS), what happens in one tends to filter down to the others. Therefore the LPFA’s decision to implement a risk-based contribution method to its scheme should strike fear in to the hearts of UK charities, including those in Scotland.

The change means that scheme contributions will be raised among those bodies which present the greatest risk. For most charities, participation in these pension schemes is soon going to cost more and, for many, it will be considerably more.

Most local government pension schemes are totally unaware that any problem exists. They are simply not alive to the issues faced by charities so there’s little flexibility available to help those which are affected

This represents a real threat to charities, many of which had been forced, or at the least strongly coerced, to participate in these schemes and could soon see both their liabilities and costs rise.

Organisations will be again faced with the Hobson’s choice of either continuing to build more liabilities which they can’t afford, or triggering a cessation debt to get out of the scheme which they can’t afford.

The few that can bear this latter option are effectively funding those organisations which remain in the scheme, creating the inequitable situation of a charity potentially helping fund the retirement of public sector workers.

Through work that I’ve done with the Department fpr Work and Pensions working party and the Charity Finance Group, we’ve also identified another major barrier in addressing this problem: most LGPS' are totally unaware that any problem exists. They are simply not alive to the issues faced by charities so there’s little flexibility available to help those which are affected.

It’s a head-in-the-sand response given the very significant and pressing impact the current structure of these schemes are having on the third sector. This problem is further compounded by the wide variation in approach adopted by schemes. This lack of consistency is leaving organisations unsure on where they stand and often forcing them to take expensive advice to identify their position and negotiate each arrangement on a totally bespoke basis.

To begin to put things right, organisations need to have the option of being able to cease accrual without triggering a cessation debt. They must also be allowed to agree a sensible funding plan which makes the continued survival of the charity more likely and therefore secures continued funding for the scheme. Given the continuation of the scheme, it needs to be recognised that any contributions paid above the ongoing basis are effectively of windfall value to it.

These measures would allow schemes to better protect their funding position for the remaining participants while giving some much needed flexibility to charities to better manage their pension risks.

Charities need to make their voice heard with LGPS both directly and through their representative bodies so the problem is recognised and to ensure sensible action is taken.

David Davison is director of actuarial practice at Spence and Partners