David Davison warns regulation around multi-pension employer schemes is forcing charities to build up unnecessary liabilities, and urges the sector to take action.

Freedom of choice, fairness and consistency are all laudable aims but ones that are being denied to many small third sector organisations, at least in respect of their pension provision. 

For many years now I’ve been banging on about the unfairness of pension schemes which in the words of the famous Eagles song Hotel California allow you to “check out any time you like but never leave.” Numerous charitable organisations participate in multi-employer pension schemes such as local government arrangements and those run by the Pensions Trust and others.

Organisations joined these in good faith and in the belief there was strength, and indeed cost saving, in numbers. However the legislation surrounding these schemes has let organisations down. The strength to be gained from co-operation has become a very significant weakness.

Many organisations have recognised the rising costs of defined benefit pension provision over recent years and not surprisingly have prudently tried to address it. Yet while charities in multi-employer schemes have witnessed organisations in stand alone arrangements close their schemes to future accrual to allow them to begin to deal with their deficits, multi-employer participants have been unable to do so.

A combination of the statutory regulation applying to local government schemes and the employer debt regulations applying to other schemes has meant that if an organisation wishes to cap its liability and close off the scheme to future benefits it will trigger, in the vast majority of cases,  a not inconsiderable cessation debt and this amount will have to be met in a single immediate  payment. This is unaffordable for most organisations which means they are forced to continue to build up further defined benefit liabilities, which may well be unaffordable, rather than being in a position to begin to prudently deal with the liabilities already accrued.

This can be in no-ones interests – not the scheme, the employer or the member. It is inconsistent, unfair and removes freedom of choice. It is limiting organisations from undertaking sensible commercial activity such as mergers or joint ventures, restricting prudent financial planning, and forcing bodies to focus resources other than where they can best meet specific charitable ends. 

There was some hope on the horizon when the government announced a review of the Employer Debt Regulations however this has unfortunately totally missed this really important issue. If you feel you would like to speak up about this issue then there is an opportunity to respond to the consultation via Mr Mike Rochford at [email protected] and your response must be received by 10 August 2011. Full details of the consultation and how to respond are available on the DWP website.

If you would like to see my response it is available here and a supporting legal response from Michael M Jones of Charles Russell can be found on their website.

I would commend you to respond as the unfairness of this issue needs to be addressed and this may well be the only opportunity available for some foreseeable time.