Seven lessons from the collapse of People Can

18 Jan 2013 Voices

People Can won't be the last charity to fall due to pension liabilities, says David Davison. But he hopes his seven lessons will help charities avoid a similar situation.

People Can won't be the last charity to fall due to pension liabilities, says David Davison, but he hopes his seven lessons will help charities avoid a similar situation.

I was immensely saddened by the news that the charity People Can was forced in to administration as a result of its pension liabilities, with the loss of services and 75 jobs. I’ve also become increasing frustrated by the outcome as more information has emerged about the circumstances surrounding its unfortunate demise.  Whilst disappointed that this has happened I am far from surprised and indeed suspect that People Can will be far from the last charity to be faced with these set of circumstances. Trustees and senior managers need to be alert to the dangers and take action to make sure they are safe from the risks these pension schemes present.

I, and many others, have been warning that the mix of charities and defined benefit pension liabilities is just an accident waiting to happen.  However, the unfortunate reality is that it’ll take a number of similar events before the nettle is grasped by government and action taken which would, if not prevent, at least to a great extent limit the damage.

Hopefully, if nothing else, other organisations can learn from what happened and take action to help secure their future and look to campaign for change.

So what are the key lessons to be learned:

  1. Defined benefit multi-employer pension schemes are highly risky for charities. The increasing cost of provision linked to falling returns, lengthening life expectancy and toxic levels of ‘orphan debt’ are leading to higher contributions at the very time when organisations finances are already stretched. Charities need to understand the risks and in many cases be prepared to take radical steps to protect the future of their organisation.
  2. Mergers, incorporations and other forms of corporate activity are problematic and indeed could even make the problem worse. Pensions are becoming the single greatest block to sensible corporate activity in the sector and they need to be dealt with head-on if a lot of time and effort is not to be wasted. High quality specialist pensions, accounting and legal advice is essential in this area as each area is complex and the interaction between a myriad of legislation is truly mind-boggling.
  3. Other organisations will find it almost impossible to come to the rescue. Trustees of one charity are unlikely to want to take on another where to do so limits the financial strength of the organisation as a whole and places the trustees at greater risk. Sadly perhaps, regardless of any social imperative, it is going to be the financials which will hold sway in any decision.
  4. The devil is in the detail. Pensions, particularly multi-employer schemes, are complex and information about them can be at best difficult and at worst impenetrable. Make sure you understand the risks and what the numbers being presented really mean.
  5. A pre-pack or solvent restructure won’t always work. Ultimately with any multi-employer scheme if an employer is unable to meet its liabilities these have to be picked up by the other employers remaining in the scheme. A solvent restructure or pre-pack will inevitably mean while some extra funding may be available it won’t completely fill the hole so the scheme trustees, or indeed other participants, may just reject any offer made.
  6. The multi-employer scheme design does at least leave member’s benefits well protected. The last man standing nature of many of these multi-employer schemes means that if an organisation becomes insolvent all those who remain solvent in the scheme have to pick up the shortfall to make sure members get their benefits. Probably cold comfort to know you’ll get a full pension even if you don’t have a job!
  7. The exit debt matters. Organisations are constantly re-assured that they don’t need to worry about the cessation deficit in the scheme as the scheme isn’t planning to close, indeed most accounting disclosures even comment on this. However as this case identifies this is far from the case. It is the exit debt that matters on restructure and ultimately when the trustees consider if they remain a going concern. Whilst it may not be an immediately pressing issue for most it’s definitely something to keep a wary eye upon. Interestingly the scheme in which People Can participated which covers the Social Housing Sector in England & Wales has a cessation deficit covering about 600 employers of around £3bn!

Charity trustees need a strategy for their pension provision, particularly now with auto-enrolment on the horizon, and this strategy could be over a very long term to allow them to deal with their legacy pensions issues. There are options out there and often bold decisive action is required.

The government also need to act and change the legislation to ensure that organisations don’t have to continue building up liabilities in these schemes beyond the point where they are affordable.

Charities who are concerned about the lack of urgency from the government should be proactive in making their views heard either through their representative bodies or directly to their MP. I can only hope that action is forthcoming in the very near future before we’re forced to comment on the insolvency of another unfortunate organisation.

 

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