Lifeline needed to rescue victims of pension trap

Many UK charities joined multi-employer pension schemes. Picture: Craig Stephen

With the impact of the 2008 economic slowdown and continuing pressures on funding still being felt by many within the charity sector, pensions legislation and practice continues to represent a real threat to the future survival of many organisations.

At the heart of the problem is that many UK charities joined multi-employer pension schemes. Unfortunately, many have now been left with an unwelcome legacy from this. What is referred to as the “last man standing” basis of multi-employer schemes means that if a participating organisation becomes insolvent, the charities which remain within the scheme assume responsibility for what are known as “orphan liabilities”. These now exceed 20 per cent of total liabilities, meaning that the charities remaining within the scheme could be paying £1 out of every £5 of their funding towards the pensions of other unconnected organisations.

Currently employers are unable to stop building up liabilities in these schemes without triggering a significant and, for most charitable organisations, unaffordable exit liability. This drain on income often means reductions in services and available funds to meet charitable objectives. It can also stifle valuable corporate activity such as mergers and impact on a charity’s ability to generate donations.

The current situation is unsustainable but, with government intervention, the problems are not insurmountable. The cessation liability (Section 75) legislation, which imposes huge financial penalties on charities wanting to exit a multi-employer pension scheme, must be changed and brought more into line with the position for standalone schemes. CFG proposals to the Department of Work and Pensions on this point are currently being considered.

A strong third sector is vital for the UK. Further progress in rolling out the CFG’s vision alongside government support to help organisations through the pensions maze they are facing are critical in protecting this important sector.

• David Davison is head of the Not for Profit practice at actuarial firm Spence & Partners