7 November 2016, 09:14

Government must get on with pensions reform

Today the Daily Mail has written a piece on charities defined benefit pension schemes - this has shone a light on the need for government to kick start long awaited pensions reform. Defined benefit pension schemes across all sections of the economy are struggling to address historic liabilities - including the Daily Mail which has a pension deficit of £159.3 million as of September 2015. Latest figures from NCVO's Civil Society Almanac show that the pensions deficit has increased slightly over the last three years from £1.56 billion in 2011/12 to £1.63 billion in 2013/14 but was down between 2012/13 and 2013/14, when the deficit decreased from £1.75 billion to £1.63 billion. But as we know figures aren't everything - as ever we need to put them into context.

Historic liabilities

Like all other parts of the economy charities are faced with a fall in equities and bond yields and rising life expectancy and this had made it hard to generate returns and recoup the loses schemes experienced as a result of the financial crash. This is a particular challenge for charities who, unlike private businesses, cannot turn to shareholders to plug the gaps. Historically low interest rates and the market volatility post the Brexit vote, continue to suppress return on investments and so there is little hope that we will see a sudden recovery of these deficits in the short term. So charities need a longer-term plans.

Charities are taking action

Charities are aware of their DB pension scheme deficits and taking steps to address them. It is worth remembering that having a deficit does not automatically mean that charities cannot manage them. Charities have taken steps such as reducing benefits, rising contributions and implementing longer recover plans in order to put their schemes on a financially stronger footing. Some have also pledged their assets. My article for Charity Financials and CFG's flagship publication Navigating the Charity Pensions Maze, elaborates on some of the options available to charities. One of the key steps that charities have increasingly taken is to close their DB schemes to future accrual. However, for those charities in non-associated multi-employer defined benefit schemes, there is the added challenge of the antiquated Section 75 cessation debt.

Government needs to wake up to reform

For those of you unfamiliar with multi-employer schemes, simply put they include more than one employer that are unrelated (so not owned in common, or under common control) where employees are promised a specific monthly basis on retirement. These schemes were presented to charities as a sensible option for their pension provision as they spread the risk among multiple employers. For this reason they were seen as particularly attractive for the smaller charities. However, if an employer in a multi-employer scheme closes without being able to fully meet their pension liabilities, an 'orphan debt' is left behind and redistributed among the remaining employers in the scheme. This means that charities in mutli-employer DB schemes have found themselves dealing with the impact of the financial crisis and the ensuing economic challenges as well as the additional burden of orphan debt. As such, charities have found themselves in a situation where they are building up deficits that they cannot afford to repay. However, where charities in single-employer, or stand alone schemes, might chose to close the scheme to future accrual, the Section 75 rules prohibit those in multi-employer schemes from doing so.

Section 75

If charities want to leave a multi-employer scheme to stop accruing liabilities they need to immediately pay the section 75 'cessation' debt. This debt is calculated on the basis of buying an annuity for some members. This is often far larger than the costs of the scheme on an ongoing basis. This means that charities face an impossible situation: continue to accrue a deficit that they cannot afford to pay, or trigger a cessation debt that they can equally not afford to pay.

What can government do?

CFG has campaigned extensively to reform Section 75 and in 2015 the DWP launched a consultation on reforming Section 75 - it seemed that the government was listening. However, since that time the DWP has been silent. We are yet to have any formal response on the consultation and what the next steps will be. CFG put forward two recommendations in our response to the DWP’s call for evidence on this issue. 1) Greater flexibility around repayments: employers in multi-employer schemes should be given additional time for repaying Section 75 debts and rules should be put in place to prevent triggering cessation debts at artificial points in the future. This will allow charities to pay down both the S75 debt and the technical provisions. This would benefit both employers and scheme members as the likelihood of insolvency and orphan debts would be significantly reduced. We do not believe that this would be any different than the current state of many stand-alone schemes, which operate on the understanding that a strong employer provides security for members. 2) Ceasing to employ active members should not trigger employer debt. The DWP have previously voiced concern that this option would mean that employers would become disengaged from the pension scheme. However, we believe this is a red herring. There is no evidence to suggest that there would be a negative impact on the scheme and its members. In fact, by enabling charities to close the scheme would stop them accruing debt that could potentially force them to close, and thereby improve the likelihood of them being able to provide scheme members their promised benefits.

CFG's next steps

CFG has written to the Parliamentary Undersecretary for Pensions (which you can read here) to call for urgent reform. If you want to keep up-to-date with our work on this issue please email policy@cfg.org.uk.