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TPT Growth Plan – is it time to part ways?

The Growth Plan is a multi-employer pension scheme set up by the Pensions Trust in 1946 for “third sector” organisations. More than 800 employers participate in the Growth Plan, including large numbers of charities, housing associations and independent schools.

The 2020 triennial valuation

The results of the September 2020 triennial valuation of the Growth Plan have recently been released. It disclosed a reduction of around £100m in its deficit – as a result the ‘average’ employer will see annual deficit and expense contributions fall by 28% from April 2022. Exit debts (the amount an employer needs to pay on exiting from the Growth Plan) also reduced at this valuation as the Actuary updated their estimates of insurance company buy-out costs, and exit debts are based on those costs.

On the face of it, this looks like good news, with the headline funding level improving and average deficit contributions reducing. But the headlines do not tell the whole story – scheme assets only earned modest returns over the last three years. Most of the improvements are due to the Trustee reducing liability reserves – removing the reserve for scheme expenses and reducing the reserve to cover orphan liabilities.

This has not changed the risks that employers are running – just the level of prudence in the funding target. Financial, longevity, orphan, regulatory and “last man standing” risks all remain. As a result, many organisations are reconsidering whether to pay their (now reduced) exit debt in order to remove these risks once and for all.

Growth Plan?

Benefits in the Growth Plan are split into four different “Series”. Series 1 and 2 are defined benefit. Series 3 is defined contribution but offers a capital guarantee. Series 4 is pure defined contribution. Following a court case Series 3 was reclassified as a Defined Benefit plan in 2014 and all Series 3 funds were invested in cash, reducing the risk of a deficit on that part of the Plan.

As a consequence of this cash investment, Series 3 members have seen only 0.35% total investment growth over the last 11 years – equivalent to 0.03% per annum – so their pension pots have been significantly eroded by inflation over time.

One option for Series 3 members is to consider transferring their Series 3 funds to Series 4 where they can access a wide range of investment funds. In my view, employers have a moral obligation to explain this to members, and should be looking to give members the information to make good decisions about their pensions.

Why consider exiting Growth Plan now?

Exiting Growth Plan removes risk - which is likely to be attractive to many organisations in these uncertain times. But it comes at a cost, so it won’t be right for all employers.

As part of the triennial valuation results, TPT provided an individual estimate of the cost of exiting the Growth Plan. Each employer’s exit debt is calculated by the scheme actuary as its share of the cost of buying out the Growth Plan’s benefits with an insurer.

Whilst the cost of exit may appear large at first glance, it is important to consider it carefully and make an informed decision. The key thing is to consider the trade-off between:

  • a relatively large one-off payment, to remove the future risks of additional contributions; and
  • regular lower payments towards the Growth Plan’s deficit and expenses, with the risks of deficits persisting, potentially for many years.

Once they understand the issues, some employers explain the cash-based investment strategy and paltry investment returns to Series 3 members, many of whom then decide move their pension funds into more appropriate investments; this also helps to reduce employers’ exit debts. A potential win-win for both parties!

My colleagues and I in the not-for-profits team have lots of experience advising employers in relation to the Growth Plan and helping them decide on their optimum strategy. This will depend on which “Series” your members are in, how large the exposure is and the affordability of the exit debt.

Please do get in touch and we would be happy to discuss the best options for you.