Charities in the LGPS – Time to check out of the Hotel California? 

Over the decades the LGPS has mushroomed from a scheme that mainly provided pensions to local government workers, to an umbrella covering over 15,000 employers across nearly 100 funds. For some of these employers, and in particular charities, the mists of time may have blurred how they ever checked in to the LGPS in the first place; in some instances, this may even be an historical accident following a reform of council services.

Although the provenance surrounding their initial membership is consigned to the past – although not quite as far back as the release of the Eagles’ classic in the seventies – what has become increasingly lucid to employers in recent years is the increasing costs of these pensions. In short, if they were looking for a place to stay today, it’s unlikely the LGPS would be their first choice.

For the first twenty years of this millennium, employers in the LGPS typically saw increasing contributions and increasing deficits. This was particularly the case for employers such as charities and other “third tier” employers – a consequence of funds understandably looking at and managing their risks more closely. This, coupled with unfavourable market conditions, led to a series of increases in contributions for these employers at each actuarial valuation. In some cases, these reached levels of 30% to 40% of salaries.

Ongoing contributions at these levels were becoming more difficult to manage. However, the cost of exiting was too high, as the cessation deficit – the price a charity has to pay to exit the LGPS – was often completely unaffordable. They couldn’t afford to stay, but just like the Hotel California, they could never leave.

Over the past two years or so, this position has changed completely. Changes in market conditions mean that most charities in the LGPS should have seen marked improvements in funding levels and reductions in cessation payments. In some cases (such as the example below), there might even receive an exit credit. Checking out has arguably never been easier or less expensive.

Well managed exits have already led to a windfall for charities enabling them to bolster the local charitable services provided – something that is mutually beneficial for the local councils in the area as well. Funds should be proactively raising this with relevant employers now to ensure they are aware of their position so that robust decisions can be taken. This can be a delicate area with Funds not wanting to encourage employers to exit the LGPS. However, the risk is if the position reverts and a charity subsequently can’t afford an exit payment at a later date, the Fund is faced with passing that debt onto other employers in the Fund.

A recent example includes a charity I worked with that suffered a large reduction in revenues due to the loss of its European funding. It was faced with a restructuring exercise and cuts to services. Prior to 2022, it had explored exiting the LGPS completely, but this would have crystalised a cessation debt of c£10m, which would have made the charity insolvent.

Since then, however market conditions have changed so materially that the cessation payment pendulum swung from a deficit of £10m to a surplus of c£5m.

A lifeline had been provided to the charity through the exit credit. In these circumstances the charity, the people they support, the wider community and the Council (who might otherwise have to provide the services or see these disappear) can all benefit. 

• The charity was able to put itself on a more sustainable footing with an alternative pension arrangement for employees that it had more control over, using some of the £5m surplus to improve the pension benefits of its newer employees. 
• Although longer standing members lost out on future accrual in the LGPS, the loss of the European funding meant that of all the potential changes required, this was perhaps the most optimal, against an extremely bleak backdrop, which included potential job losses.

Of course, not all charities would see such a positive result, and some would still face a cessation debt. But even here, the amounts would be greatly reduced compared to a few years ago, meaning they have options around pension provision and risk that they couldn’t afford before.

There has never been a better opportunity for charities to work together with their advisers and LGPS Fund collaboratively, for a mutually beneficial outcome.

At Mercer we are already working with funds and charities in this very area – contact one of our experts below if you want to hear more about how we can support you.

At Mercer we provide all the actuarial technical expertise and technological support you would expect in providing services to the LGPS. However, it is important that this bedrock to our advice is implemented via a transparent framework that allows clear decision making and robust risk control for Funds when determining funding outcomes. The benefit to our clients is it allows LGPS Funds full control over their funding strategy whilst also being able to communicate decisions simply and clearly to stakeholders. This is even more important in the current climate of improving funding levels and budget uncertainty for employers.