Exempting charities from 'last man standing' pensions obligations will have wide-ranging implications, many of them negative, warns Spence and Partners' David Davison.
It's great to see Lord Flight picking up the baton in the Wedgwood case, making it much more high profile. However, the proposal to exempt charities from 'last man standing' obligations in multi-employer pension schemes could have wide-ranging implications - many of them negative - for not only the charities but also their staff, as well as for the pension scheme in which the charities participate. While I agree whole-heartedly there is a need for urgent change in this area, the issues involved are many and complex, and any solution needs to be carefully considered.
While the potential loss of hundreds of years of heritage is sad, it's important to highlight the reasons behind the Wedgwood ruling. The Wedgwood Museum was deemed to be part of the Wedgwood Group and therefore ultimately connected to the group for pension purposes, having had Museum staff participating in the pension scheme. Ultimately, the group made pension promises to members of the scheme, and those members have a legal entitlement to receive the benefit promised or, at the very least, honoured to the maximum extent possible. So the money from Wedgwood Museum will ultimately improve some members' pensions or go into the Pension Protection Fund to improve the protection of others who might lose their benefits.
The design of the scheme was known by the various parties from the outset, and any change to member entitlements could rightly be questioned from a member perspective. Perhaps the question that should be asked is why the charity and its trustees allowed themselves to be linked with the trading organisation in this fashion and why no clear legal separation existed. In my view, it is hard to envisage circumstances where the participation of a charity in a defined benefit pension arrangement does not represent an untenable and unacceptable risk.
The Wedgwood case turns on very specific circumstances in that there was a connection between two ostensibly disparate organisations. The vast majority of charities that may be impacted by similar issues in other schemes are unconnected. Charities participating in local government or industry-wide schemes such as those run by the Pensions Trust are on the hook for orphan liabilities arising through the insolvency of organisations with which the charities have absolutely no connection. As more organisations fail, these orphan liabilities become an increasing share of overall liabilities. In one scheme I've witnessed recently, orphan liabilities account for 20% of total liabilities, which means that £1 in every £5 that participating charities put into in this scheme is to meet the obligations of another unconnected organisation now no longer in existence, and to which their donors may not wish to provide support.
If legislation were enacted to prevent the 'last man standing rule from applying to charities, it would only be fair if it were applied consistently to all charities and all schemes. That being the case, what would be the impact on a scheme such as the one outlined above? Such a proposal would fundamentally change the structure of many schemes and put members' benefits at risk, and could significantly increase the cost of participating for many organisations, potentially even driving them towards insolvency.
Unpalatable as it is, the charities concerned have entered into these arrangements with the scheme and their staff, and I don't believe there is or should be an option to allow organisations to simply walk away from their obligations. That does not, however, mean there shouldn't be a wider range of options available to allow them to manage their liabilities better.
This logically leads to a need for a fundamental review of the Section 75 legislation at the very heart of these issues and, as part of that, to consider the issue of 'last man standing' arrangements. Further action is undoubtedly necessary and required urgently. A review was carried out by the UK Department for Work & Pensions (DWP) in 2011 with the results published in mid-December, and it recognised the issue for charities, with the view expressed that further consultation was required.
Helpfully, this paved the way for a further review, and this does present the sector with an ideal opportunity to air its views. Lord Flight can very helpfully bring pressure to bear in progressing this review, and this would seem to present an ideal mechanism for the further action that is needed. Any additional support that can be given by organisations or their representative bodies would be welcome and should be addressed to the DWP.
In the meantime, charities with trust funds connected to other organisations should be actively clarifying their governance status. Unconnected organisations should be looking to manage their risk exposure as part of these schemes, and, above all, charities should not be considering joining such arrangements in future.
David Davison is head of public sector, charity and not-for-profit practice at Spence and Partners