The Department for Work and Pensions has launched a consultation into rules changes which would potentially allow thousands of charities to exit cripplingly expensive multi-employer pension schemes.
At present several thousand charities, mostly medium-sized, have employee members in multi-employer schemes. Most of these schemes are in substantial deficit because they were not adequately funded in the past.
The DWP consultation, Section 75 Employer Debt in Non-Associated Multi-Employer Defined Benefit Pension Schemes, outlines several options for charities to leave these schemes without having to pay an unaffordable lump sum up-front.
Multi-employer pension schemes face debt because of three main factors: a failure of the markets to perform as well as expected, longer lifespans, and stricter rules around payments. Many schemes also have "orphan debt" from employers who have liquidated, which is shared between the remaining members.
The requirement to make up these deficits, plus the requirements from schemes to make quite generous contributions for the future, has made these schemes too expensive for most charities. However most charities are unable to leave a scheme without having to pay off the deficit at one go. This is known as a section 75 debt.
Section 75 debts are usually larger than the liability a charity would face if it remained in the scheme, often referred to as the "continuance basis" liability. If an employer leaves the scheme debt is calculated on a stricter "exit" or "buyout" basis - effectively as if the employer was required to buy an annuity for all employees at the date of closure, rather than years in the future.
Normally a section 75 debt is so large as to be unaffordable, forcing charities to remain in the scheme, even though the payments are also, in the long run, unaffordable.
However many charities find themselves forced to leave a scheme because they only employ one or two members enrolled in it. When the last of these people retires, the debt will be triggered. Many charities have been forced to enrol employees in these schemes specifically to avoid triggering a debt, while other charity employees are believed to have found themselves unable to retire because doing so would bankrupt their charity.
One option in the DWP consultation suggests that you should be allowed to withdraw all members from the scheme - effectively "freezing" the scheme, meaning you do not have to continue to make payments - without triggering a S75 debt. This would mean you do not have to continue to make payments for future benefits but would agree a future funding plan with the trustees.
Another option is that you should be allowed to negotiate an individual exit plan with the employer. A third is that you should still trigger a S75 debt, but that debt would be less than the current the liability on a "buyout" basis. This would have the disadvantage that members still in the scheme would have greater risk.
Andrew O’Brien, head of policy at Charity Finance Group, said: “The consultation is a positive step forward. Section 75 debt has been a burden for many charities. It’s important to put in place rules to stop charities from incurring ever larger pensions deficits.”
David Davison, head of public sector, charities and not-for-profit at Spence & Partners, said: "I greatly welcome this consultation. It is the result of around 4 years hard lobbying by charities, their advisers and representative bodies. The real effort starts now in supplying the evidence to make sure we get the change the sector wants and needs.”
The consultation runs to 22 May.
