Charity Finance Group warns of 'ticking time-bomb' of cessation debts

The government is consulting on proposed changes to section-75 debt in non-associated, multi-employer, defined-benefit pension schemes

The Charity Finance Group has welcomed a government consultation on proposals to defuse what the umbrella body calls the "ticking time-bomb" that is the requirement for charities to pay potential six-figure "cessation debts" in defined-benefit pension schemes.

The consultation, which was launched last week, comes after a call for evidence about section-75 employer 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.

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. The government has said there is anecdotal evidence that the debts have driven some employers to insolvency.

After the call for evidence closed in May 2015, the Department for Work and Pensions has now proposed allowing employers in such schemes to defer the payment of the cessation debt when the last employee of the charity in the scheme leaves.

A consultation about the new proposals has been launched and will run until 18 May.

The consultation says the new proposals work on the understanding that the employer would instead retain their existing responsibilities to the pension scheme and be treated as if they were an employer in relation to that scheme.

A funding test would also need to be satisfied before the deferred debt arrangement could be entered, the consultation says.

Anjelica Finnegan, policy and research manager at the CFG, said: "The significant response from the sector to the consultation demonstrated the threat – seen as a ticking time-bomb – to the sustainability of charities in multi-employer pension schemes.

"The proposals should allow charities that cease to employ active members in the scheme to defer the requirement to pay a cessation debt and focus on paying down the technical provisions. In theory, this should free charities from the current catch-22 whereby they can afford neither to exit a multi-employer scheme, nor to remain in the scheme.

"But the devil will be in the detail. For example, it will be important to have safeguards in place to prevent scheme trustees triggering a section-75 debt at an artificial point in the future."

Finnegan said that the government’s proposals "are a significant step forward", but they would not mandate scheme trustees to use the deferred-debt arrangement.

She said the government should promote this as the default option for charities that are considering closing their multi-employer schemes.

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