David Davison: Why charities should engage with the DWP's consultation on multi-employer pension schemes

The move could give member charities greater flexibility to exit these schemes, writes the head of the not-for-profit practice at Spence & Partners

David Davison
David Davison

Thousands of small and medium-sized UK charities are trapped in expensive and inflexible multi-employer pension schemes that they can’t get out of because of the excessive one-off exit cost known as Section 75 debt. This has resulted in a number of charities being forced into administration, notably the Spirit of Enniskillen Trust and People Can, both of which shut their doors in 2013. Many more remain under threat.

The situation has been so detrimental to the third sector that the Department for Work and Pensions has now launched a consultation on changing the current rules so that member charities might have greater flexibility in exiting these schemes. The call for evidence concludes on 22 May and I would urge charity bodies to contribute. The case for reform is overwhelming, and charities need to be aware of the issues they face and provide commentary to the DWP. Below, I’ve highlighted seven reasons why change is needed and on which charities could specifically comment. 

1. Defined-benefit, multi-employer pension schemes are highly risky for charities. The increasing cost of provision, linked to lower returns, lengthening life expectancy and toxic levels of orphan debt, are leading to higher contributions at a time when organisations' finances are already stretched. All this and legislation that makes it difficult to escape once you’ve signed up.

2. Mergers, incorporations and other forms of corporate activity are problematic and could even make the problem worse. Pensions are becoming the single greatest block to sensible corporate activity in the sector and they need to be dealt with head-on if a lot of time and effort is not to be wasted. High-quality specialist pensions, accounting and legal advice are essential because they are complex areas and the interaction between myriad pieces of legislation is truly mind-boggling.

3. Other organisations will find it almost impossible to come to the rescue. Trustees of one charity are unlikely to want to take on another if to do so limits the financial strength of the organisation as a whole and places the trustees at greater risk. The simple fact is that, regardless of any social imperative, it is the financials that will swing any decision.

4. The devil is in the detail. Pensions, particularly multi-employer schemes, are complex and information about them can be, at best, difficult to understand and, at worst, impenetrable – the pitfalls can be numerous and expensive.

5. A pre-pack or solvent restructure won’t always work. Ultimately, with any multi-employer scheme, if an employer is unable to meet its liabilities these have to be picked up by the other employers remaining in the scheme. A solvent restructure or pre-pack will inevitably mean that, although some extra funding might be available, it won’t completely fill the hole. This means that the scheme trustees, or other participants, might just reject any offer made.

6. The multi-employer scheme design does at least leave members' benefits well protected. The last-man-standing nature of many of these multi-employer schemes means that, if an organisation becomes insolvent, all that do remain solvent within the scheme have to pick up the shortfall to make sure members get their benefits. However, this only works up to a point – if liabilities are in excess of employer assets and charities are forced to keep accruing, member protection deteriorates.

7. The exit debt matters. Organisations are constantly reassured that they don’t need to worry about the cessation deficit in the scheme becasue it isn’t planning to close – indeed, most accounting disclosures comment on this. This is far from the case, however. It is the exit debt that matters in the event of a restructure and, ultimately, when the trustees consider whether they remain a going concern. It might not be an immediately pressing issue for most, but it’s definitely something to keep a wary eye upon. Indeed, many employers within local government pension schemes are already being asked to fund contributions on this basis.

I’ve long been calling for the government to take action and change legislation to ensure organisations don’t have to continue building up unaffordable liabilities in these schemes, so I’m delighted the DWP is finally taking this forward. I’ve certainly submitted views and would urge others to do likewise.

For the reasons set out above, all charities involved in multi-employer pension schemes must take advantage of the brief window between now and 22 May to make their views heard and help to deliver much-needed reform. The future viability of many third-sector organisations is dependent on progressive change that will enable them to meet their pension obligations without having their viability put at risk.

David Davison is an owner and the head of the not-for-profit practice at actuaries Spence & Partners

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