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17th September 2013

Charities and Pension Shortfalls

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We explore some of the issues that pension shortfalls create for charities with defined benefit pension schemes.

We explore some of the issues that pension shortfalls create for charities with defined benefit pension schemes. Recovery plans Last year, the pension shortfall (calculated on an accounting basis) of forty of the UK’s largest charities totalled £800 million. It was recently reported that one of those charities, the RSPCA, has a £54 million shortfall in its scheme. When a scheme has a shortfall at the date of its triennial actuarial valuation the trustees must put in place a recovery plan to eliminate that shortfall as quickly as the employer can reasonably afford. A copy of the recovery plan must be sent to the Pensions Regulator. The recovery plan for the RSPCA’s scheme will see the RSPCA pay a lump sum of £10 million and make additional payments of £1.5 million each year for ten years. The RSPCA will also dispose of various properties and use some of the funds raised to reduce the pension shortfall. Incentive exercises Some charities undertake incentive exercises to try and reduce their pension shortfall prior to an actuarial valuation. For example, the Royal British Legion offered members of its scheme the opportunity to give up future non-statutory pension increases in return for an immediate pension increase. Such exercises are supported by a voluntary code which sets out good practice principles to be followed and requires members to take independent advice before taking up the offer. Employer debts The full amount of an employer’s pension shortfall falls due from it as a debt on its insolvency, on the winding-up of the scheme, or, in a multi-employer scheme, when an employer no longer employs any active scheme members who are accruing defined benefits at a time when another employer continues to do so; this usually happens when an employer leaves the scheme or its employees are transferred elsewhere. Closing a multi-employer scheme to defined benefit accrual will not trigger a debt if all employers stop accrual at the same time, but employers in closed schemes are still liable for debts when the scheme winds up or the remaining scheme employers become insolvent. To avoid having an unknown liability hanging over them, employers in closed schemes can trigger their debts themselves by giving notice to the trustees. Mechanisms are available that allow employers to apportion debts among the remaining employers in the scheme. There are also statutory easements under which no debt will be triggered if a small-scale or ‘one-to-one’ restructuring takes place and specific conditions are met. Industry concerns The Department for Work and Pensions (“DWP”) recently consulted on the ‘one-to-one’ restructuring easement after concerns that it did not reflect its policy intention and apply in situations, for example, where an organisation is changing from an unincorporated charity to incorporated company. However, due to the impracticality of the specific conditions that must be met to use the easement, most employers still favour apportionment of the debt. Unless otherwise apportioned or met, the last remaining employer in a multi-employer scheme becomes the ‘last man standing’ liable for the entire remaining debt owed by all previous participating employers. This is unpalatable for many charities and may deter donors who are unwilling to see donations used to fund pensions; the Wedgewood collection was ruled to be available to meet the debt owed by the ‘last man standing’ in the Wedgewood group. A joint working group from the DWP and the Charity Finance Group are reviewing the issues around pension shortfalls. One option being explored is the segregation of ‘last man standing’ schemes to allow employers to ring-fence their own liabilities. It is hoped that the outcome will begin to address the difficulties that pensions can cause for charitable organisations. If you have any questions on pension shortfalls, please contact Christopher Nuttall on 01604 463134 or christophernuttall@hewitsons.com.