Government proposals 'will help charities caught by pensions catch-22'

24 Apr 2017 News

The Department for Work and Pensions has proposed an amendment to pension regulations intended to help charities facing financial difficulties because of their pension schemes arrangements.

Many charities currently have staff in pension schemes also run by other employers. These multi-employer schemes typically offer a generous "defined benefit" pension, which guarantees the level of income that employees in the scheme will receive in retirement.

Some feel these schemes have become unaffordable. But existing rules mean that if the charities withdrew from the scheme, they would be required to make a large one-off payment - also seen as unaffordable by most charities.

The Charity Finance Group says this leaves charities in a "catch-22 where they can neither afford to exit a multi-employer scheme, nor to remain in the scheme".

Government has now said it will change the rules to allow schemes to give charities and other employers more time to pay when they leave a scheme - a move which charity experts say could solve the problem, depending on how well it is implemented.

However government will not make the new rules mandatory for pension schemes, meaning that some multi-employer schemes may not implement them.

DWP consultation

DWP consulted on the issue of multi-employer schemes in March 2015, and received 77 written responses to a call for evidence. Most of the responses came from individuals with connections to the charitable sector -either as employers, pension scheme trustees or professional advisers.

The majority of respondents supported a change to section 75 of the Pensions Act to help employers manage debts that arise when an organisation has no more employees in a multi-employer pension scheme and it is required to pay money to leave the scheme, known as “exit debt”.

Employers with a very small number of active members who were approaching retirement feared the consequence of an employer debt being triggered when their last active member retired.

In the light of these responses and following further engagement with stakeholders the government now proposes to allow employers in such schemes to defer their payment of exit fees.

This arrangement would be subject to a condition that the employer retains all their previous responsibilities to the scheme and continues to be treated as if they were the employer in relation to that scheme.

A consultation on the government's intended changes will run until 18 May.

CFG welcomes changes

Anjelica Finnegan, Charity Finance Group policy and research manager, said the proposed changes came as a result of the sector's lobbying.

“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 who 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 where they can neither afford to exit a multi-employer scheme, nor to remain in the scheme."

But Finnegan warned "the devil will be in the detail" and urged DWP to put in place safeguards to prevent trustees triggering a section 75 debt at an artificial point in the future.

"Whilst these regulations are a significant step forward, they won’t mandate scheme trustees to use the deferred debt arrangement and I would urge the DWP to promote this as the default option for charities looking to close their multi-employer scheme,” she added.

David Davison, director of Spence & Partners, similarly welcomed the proposals and commended DWP for not delaying their release until after the general election.

He said: "The proposals are encouraging and will hopefully provide a valuable option for employers but also help protect member security by avoiding employers building up benefits which they can’t afford.

"As ever with these sorts of changes the devil will be in the detail post the consultation. I would like to see a position where the deferred debt arrangement was the default arrangement with a move to a full cessation only being used with agreement between an employer and trustees or by trustees should certain criteria not be met.

"The proposals as they stand at the moment do seem to place a lot of power and discretion in the hands of trustees which could allow them to make the solution at best unattractive and at worst unworkable. It might be the final regulations need to strike a slightly better balance between the powers of employers and trustees."

The consultation applies to England, Wales and Scotland and runs until 18 May. It is anticipated that Northern Ireland will make corresponding regulations.

 

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