Charities could be responsible for 'orphan' pensions liabilities, born from unconnected organisations. David Davison offers his advice to prevent an outcome as seen in the Wedgwood case.

Whilst it’s great to see Lord Flight picking up the baton in the Wedgwood case and making it much more high profile, the proposal to exempt charities from ‘last man standing’ obligations in multi-employer pension schemes could have wide ranging implications, many of them negative, for not only the charities but also their staff, as well as for the pension scheme the charities participate in.

I agree whole-heartedly that there is a need for urgent change in this area, however the issues involved are many and complex and any solution needs to be carefully considered.

Whilst the potential loss of 100’s of years of heritage is sad, it’s important to highlight the reasons behind the Wedgwood ruling. The Wedgewood Museum was deemed to be part of the Wedgwood Group and therefore ultimately connected to the Group for pension purposes having had Museum staff participating in the pension scheme. Ultimately the Group made pension promises to members of the scheme and those members have a right to expect those promises to be honoured to the maximum extent possible. So the money from Wedgwood Museum will ultimately improve some members’ pensions or go in to the Pension Protection Fund to improve the protection of others who might lose their benefits.

The design of the scheme was known by the various parties from the outset and any change to member entitlements could rightly be questioned from a member perspective.

Perhaps the question which should be asked is why the charity, and its trustees, allowed themselves to be linked with the trading organisation in this fashion and why no clear legal separation existed? In my view it is hard to envisage circumstances where the participation of a charity in a defined benefit pension arrangement does not represent an untenable and unacceptable risk.

The Wedgwood case turns on very specific circumstances in that there was a connection between two ostensibly disparate organisations. The vast majority of charities who may be impacted by similar issues in other schemes are unconnected. Charities participating in local government or industry wide schemes such as those run by the Pensions Trust are on the hook for orphan liabilities arising through the insolvency of organisations with which the charities have absolutely no connection. As more organisations fail these orphan liabilities become an increasing share of overall liabilities.

In one scheme I’m aware of orphan liabilities account for 20 per cent of total liabilities which means that £1 in every £5 that charities participating in this scheme pay, is to meet the obligations of another unconnected organisation now no longer in existence, and to which their donors may not wish to provide support.

Last man standing rule

If legislation was enacted to prevent the ‘last man standing’ rule applying to charities it would only be fair if it was applied consistently to all charities and all schemes. That being the case what would be the impact on a scheme such as the one outlined above?

Such a proposal would fundamentally change the structure of many schemes, put member’s benefits at risk and could significantly increase the cost of participating for many organisations, potentially even driving them towards insolvency.

Unpalatable as it is, the charities concerned have entered in to these arrangements with the scheme and their staff, and I don’t believe, therefore, that there is, or should be, an option to allow organisations to simply walk away from their obligations. That does not however mean that there shouldn’t be a wider range of options available to allow them to manage their liabilities better.

This logically therefore leads to a need for a fundamental review of the Section 75 legislation at the very heart of these issues and as part of that to consider the issue of ‘last man standing’ arrangements. Further action is undoubtedly necessary and required urgently. A review was carried out by the DWP in 2011 with the results published in mid December and whilst it recognised the issue for charities, the view expressed was that further consultation on the issue was required.

Helpfully this further review does present the sector with an ideal opportunity to air its views. Lord Flight can very helpfully bring pressure to bear in progressing this review and this would seem to present an ideal mechanism for the further action that is needed. Any additional support which can be given by organisations or their representative bodies would be welcome and should be addressed to the DWP.

In the meantime charities Trust Funds connected to other organisations should be actively clarifying their governance status, unconnected organisations should be looking to manage their risk exposure as part of these schemes and above all charities should not be considering joining such arrangements in future.