Pension scheme payments and debts that charities cannot afford should be reformed to prevent pension deficits pushing some charities out of business, according to a letter to the government from the Charity Finance Group.
Last year the Department for Work and Pensions issued a call for evidence about the impact on some employers of section 75 debt in non-associated, multi-employer, defined-benefit pension schemes – those that include more than one employer and provide a specific monthly payment to employees on retirement. The call for evidence closed in May 2015.
Section 75 debts are triggered automatically when employers want to leave such a scheme. This "cessation debt" often far exceeds the annual costs of remaining a member.
Sent last week to Richard Harrington, the Parliamentary Under Secretary of State for Pensions, the CFG’s letter says cessation debts mean many charities continue to pay into pension schemes they cannot afford to avoid paying much greater sums on leaving.
The CFG’s response to the call for evidence asked for section 75 to be reformed to allow for more flexible repayment plans and to prevent the automatic triggering of the cessation debt. The DWP has yet to respond formally, despite more than a year having passed.
In last week’s letter to the DWP, Caron Bradshaw, chief executive of the CFG, urged the DWP to respond. She said some charities had been pushed out of business because of the burden of their pension scheme payments.
The letter cited the case of the local support charity Community Matters, which closed earlier this year after its pensions deficit of more than £330,000 put off potential merger partners.
The CFG’s letter said: "For employers in multi-employer schemes, section 75 provides perverse incentives to continue to accrue debt that they cannot afford in order to avoid triggering immediate payment of cessation debt. This has resulted in charity closures, including Community Matters earlier this year.
"The closure of these charities resulted in the loss of hundreds of jobs and has put more pressure on the remaining employers in the scheme. Protecting the provision of pensions to scheme members is paramount, and I believe that reforming section 75 achieves this."
Anjelica Finnegan, senior policy and public affairs officer at the CFG, said: "Section 75 needs to be consigned to history. This is not about allowing charities off the hook in terms of paying off their schemes’ deficits, but protecting them from further accruals and untying their hands to allow them to put robust plans in place to pay off their deficits.
"At present, charities that want to exit these schemes will have to pay cessation debts even greater than the costs of the scheme on an ongoing basis, which means that charities are stymied. We have already seen section 75 contribute to the closure of charities this year and we’re calling on the DWP to act now before the economic climate and market volatility after the EU referendum exacerbate the situation."
A DWP spokesman said: "We are continuing to look at how existing arrangements are used by employers and schemes to manage employer debt and will respond to the call for evidence in due course."