Changes which could help charities cope with pension deficits are on the radar, but would require further government consultation, says David Davison.

In previous blogs I have highlighted the inequity which many charities face as a result of the perfectly reasonable historic decision they may have taken to provide their staff with a quality pension benefit. The problem was that having taken this decision, regardless of how their position or that of the pension scheme may have changed over time, they were unable to amend their decision and stop accruing further benefits, even if it was clear they couldn’t afford them. Patently unfair and totally inconsistent with the majority of pension arrangements available outside of the sector.

There was however one ray of hope in a DWP Consultation on Employer Debt launched in June 2011.

The results of this review were published just before Christmas in the snappily titled Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2011 - S.I. 2011/2973 which unfortunately didn’t address any of the issues raised about the sector and its pension provision.

The response to the consultation does however provide some specific comments as follows:

8 (a) Employers in charitable and voluntary sectors

Some respondents raised concerns about non-associated employers, particularly not-for-profit and charitable employers. These employers would not be assisted by many of the easements available for dealing with an employer debt. Where an employment-cessation event occurred to such an employer the only options were to pay the debt or to use the period of grace. As many of these employers could not pay an employer debt, they had to continue to participate in the scheme in order to avoid one triggering. One respondent suggested that to help these employers, no debt should trigger on ceasing to employ an active member where the employer continued to meet its scheme funding obligations.

9 The government recognises that some non-associated employers can face problems with an employer debt. The extension to the period of grace, which is provided for by these regulations, was prompted by representations from such a group. However amending the employer debt requirements so that no debt is payable where scheme funding obligations continue to be met would be a much bigger step and would need to be carefully considered. For example, member protection would need to be considered carefully. This would be a change that would go much wider than the subject matter of these regulations and the government would want to carry out a further consultation.

So a bit of bad news, good news... but more bad news! The bad news is that nothing is going to be done at the moment but there is the option for the government to carry out further consultation.

The response shows a fundamental misunderstanding of the issue of member security as the Local Government Pensions Scheme (LGPS), and similar multi-employer schemes such as those run by the Pensions Trust and others, are all ‘last man standing’ arrangements. If an employer becomes insolvent then the debt is picked up automatically by the other participants so the member is fully protected. Even if the whole scheme collapses the Pension Protection Fund (PPF) would provide protection, however this is massively unlikely as has been recently recognised by a reduction in the PPF levy for some of these schemes. So the likelihood of a scheme of this type failing is negligible.

Allowing employers to continue to build liabilities which they cannot afford make this less the case. If an employer exits and makes a contribution over time in excess of the ongoing funding level (eg at cessation level) then the ongoing funding position of the scheme as a whole improves so members are better protected. In addition other employers are at a lower risk of having to assume responsibility for liabilities for higher risk employers – particularly the case for public bodies such as local authorities who are effectively standing guarantor as things stand at the moment.

Paradoxically both the participating organisations and those administering the schemes recognise the need for these organisations to be able to exit on affordable terms but both are being hamstrung by inappropriate legislation, a piece of legislation which incidentally recently won a poll as the worst piece of pensions legislation.

This is a very significant issue for many charities and its rectification can no longer be delayed. For example, many charities participating in LGPS will undoubtedly shortly be receiving news of further contribution increases as a result of updated actuarial valuations and the organisations affected need to have options.

So if you’re affected by this, lobby your MP, correspond directly with the pensions minister Steve Webb, or make your voice heard through any representative bodies available.