A Northern Irish charity – the Spirit of Enniskillen Trust – is being wound up by a liquidator because it cannot meet its pension liabilities. Many other charities are also facing rising contributions to defined benefit pension schemes at a time when their finances are already stretched. Charities which participate in multi-employer pension schemes, along with other unconnected charities, face particular difficulties.
The government appears to be recognising the pension problems faced by charities and a joint working group has been set up by the government and the Charity Finance Group (CFG) to “thrash out” the issues. This working group will look at what improvements could be made to the rules surrounding employers leaving multi-employer schemes, with the needs of the charity sector in mind.
An employer which leaves a multi-employer scheme becomes liable to pay a statutory “section 75 debt” to the scheme. A section 75 debt represents the employer’s share of the pension scheme deficit, calculated on the insurance buy-out basis. Employers will wish to avoid crystallising a section 75 debt as it can amount to a large potential liability. Charities participating in multi-employer schemes are therefore often caught in a double bind – if they leave the scheme an unaffordable section 75 debt will be triggered but if they remain in the scheme further pension liabilities will be built up.
Last man standing
The position for employers which remain in a multi-employer scheme is made worse where the scheme operates on a “last man standing” basis. Here the unpaid liabilities of past employers become the responsibility of the continuing employers – so-called “orphan liabilities”. This means that where an employer becomes insolvent, its pension liabilities effectively pass to the remaining employers, which can then trigger further failures via a domino effect. This is particularly difficult for charities, as donations to one charity could then end up being applied to meet a completely unrelated charity’s pension liabilities. Many charities participate in last man standing schemes and the CFG has recently described this situation as “simply unsustainable”.
The CFG has asked the government to:
- review the legislation to permit charities to cease accruing benefits in a multi-employer scheme without triggering a section 75 debt;
- explore options for a support fund to allow charities to borrow money to pay off pension deficits and repay the amount over an agreed period of time; and
- create greater flexibility around the Pension Protection Fund to allow pension schemes to operate more flexibly, in a way that is more responsive to employers’ financial situations
It remains to be seen whether the working group review will produce any concrete results, as there are competing interests for the government to consider here. In the meantime, there are potential options which charities can consider to address their future pension liabilities. However, without radical action, some charities’ past pension liabilities could prove unsustainable, as was the case for the Spirit of Enniskillen Trust.