David Davison looks at why thousands of charities will be hit with an unforeseen pension deficit under new changes from the Department for Work and Pensions.
There’s an old adage “if it looks like a duck, waddles like a duck and quacks like a duck, it’s probably a duck.” Unfortunately, where this relates to pensions that duck is probably a chicken with a limp and a sore throat! The decision of the DWP to look to revise the definition of a money purchase pension arrangement as part of the Pensions Act 2011, following the “Bridge” legal case at the end of 2011, has caused untold chaos as organisations who thought they had a defined contribution pension arrangement with a fixed cost and no deficit risk turned out to have a defined benefit pension often with a very significant deficit. Oops!
Under the Bridge case the Supreme Court effectively decided that just because a scheme could build up a deficit, it didn’t mean that it couldn’t be a defined contribution arrangement. The DWP took the contrary view that schemes which provide any sort of underlying guarantee or provide pensions directly from the scheme are effectively defined benefit schemes. Even though the legislation isn’t officially in place at this point in time, given that the DWP want to carry out some consultation, everyone needs to act as if it is in place as the DWP confirmed that it will have a retrospective effect.
This has seriously impacted on thousands of charitable organisations as part of the Pensions Trust Growth Plan arrangement, and around 1,700 in particular who participate solely in the Series 3 section of this Scheme. Many of these have been hit with either a deficit for the first time or a substantially increased deficit. How can this be you may ask?
Well, GP3 provides an underlying guarantee that the asset value for any member can’t fall, so it needs to return at least 0.7 per cent per annum just to cover contract charges. To make sure the scheme was in a position to do this and not create a deficit the assets were invested in very low risk deposit type investments. It is this underlying guarantee which means that the scheme has now effectively become classified as a defined benefit scheme. Not surprisingly this has been a bit of a shock to a number of participants, particularly those who were allowing staff to use the scheme to pay additional voluntary contributions, as despite not paying any contributions to the scheme the employer has inherited a pension deficit, and for many a significant deficit at that!
The issue here isn’t so much that GP3 participants have built up a substantial debt, as they couldn’t have given the investment basis of the Scheme, but rather that because of the ‘umbrella’ nature of the Scheme those in GP3 have inherited part of the ‘true’ DB deficit attributable to those employers in GP1 & GP2. Clearly the situation is at its most severe for those who are just in GP3 as they will be picking up increased liabilities. The position is less clear cut for those employers with GP3 and GP1 and/or GP2 liabilities as there may be some offsetting of the increase in GP3 liabilities with a reduction in GP1 and GP2. The true position will only be apparent if organisations analyse how their liabilities are split.
Interestingly as part of the DWP’s proposals they said they would look at “consequential or transitional provisions to avoid adverse consequences.” I can’t really see much more significant adverse consequences!
The Pensions Trust has made some proposals for the future although clearly they are not providing participants with advice or recommendations. There are undoubtedly some options open to organisations to deal with the situation, but they would be very much based upon each individual set of circumstances. Organisations need to begin to consider these as quickly as possible to try to avoid the position deteriorating further.
In addition, hopefully the Pensions Trust will be highlighting with the DWP just how “adverse the consequences” of their actions have been and looking to see if anything can be done.