This article explores some key issues which employers participating in public service pension schemes should be aware of as they will have to deal with them. The schemes in question are undergoing fundamental reform with significant consequences.
News about pensions used to be confined to the middle pages of traditional newspapers, nowadays, stories are often front page material regardless of newspaper size or quality. This is because so much has happened, particularly over the last twenty years, to change the way we think about pensions and the changes will have implications for us all.
For employers participating in public service pension schemes, structural changes being made to those schemes now is affecting how the managers and administrators of those schemes approach funding, investment (where we are dealing with funded pension schemes as opposed to unfunded schemes) and governance. The consequences for employers are likely to be significant.
Public service schemes
An institution such as a university or college of higher or further education will typically participate in two or more public service pension schemes. Shoosmiths advises, on an ongoing basis, a higher education corporation which employs members of the Teachers' Pension Scheme (TPS), the Universities' Superannuation Scheme (USS) and the Local Government Pension Scheme (LGPS). Let's call this institution the HEC.
Each of these three schemes provides benefits on a salary-related or defined benefit (DB) basis which means that, ultimately, the employer or the employers of that scheme or those schemes underwrite the cost to the scheme of providing the benefits to the members.
The TPS is, to an extent, the exception amongst the three schemes referred to above. This is because, like many public service pension schemes, the TPS is an unfunded arrangement which, to cut a long and technical explanation short, means that the taxpayer is the ultimate underwriter of the benefits it pays to its members.
The issues in practice
In acting for the HEC (defined above), Shoosmiths has been involved in intense negotiations with the TPS managers, the trustees of the USS and the administering authority for the relevant section of the LGPS. Taking the last of these as an example, we have found the following:
- that the administering authority (Authority) took a more active approach to managing the deficit in its section of the LGPS
- because of this, the Authority required HEC to pay ongoing contributions on a significantly increased basis
- linked to 2 above, the Authority required HEC to pay additional deficit repair contributions (these were high - well in to six figure payments per month)
Shoosmiths pension team successfully challenged the basis for the Authority's calculations, its reasons for requiring increased contributions and additional monthly payments and, in short, obtained a significant reduction in HEC's payments to the LGPS. Without giving too much away, the value of the saving made in one month covered this firm's fees more than twice over.
One concern is that, like many employers in the private sector, employers in the public sector (including those private sector entities that employ former public sector workers and, because of this, participate in public service schemes) will be unduly hampered by pension concerns.
For some years, balancing the funding needs of a DB pension scheme against the ongoing viability of an employer's business has been getting progressively more difficult. This highly complex issue is being transposed in to public service schemes so that, unless employers are able to take proper legal and actuarial advice, there is a risk of the so-called pensions tail wagging the academic dog (vis. HEC in our example).
The concern referred to above in the case of HEC manifested itself in the material risk that, if HEC simply agreed to make the contributions at the levels proposed by the Authority, doing so would:
- effectively be preferring the interests of the LGPS
- potentially damage HEC's ability to function as a higher education corporation; which in turn would
- weaken its ability to support the pension schemes in question.
The above constitutes one of the clearest examples of a vicious circle that it is possible to create. Shoosmiths has worked alongside another business which provided actuarial advice, to demonstrate to the Authority (and, subsequently, the managers of the USS and the TPS) that it was in all parties' interests to adopt a more flexible, moderate recovery plan. In doing so, we were able to reverse the trend that (1) to (3) above could have established.