Section 75 debt reform – an opportunity we cannot afford to miss

May 26, 2015 at 15:59

Last Friday saw the close of the Department for Work and Pension’s call for evidence on (the catchily titled) Section 75 Employer Debt in Non-Associated Multi-Employer Defined Benefit Schemes.

I assume that most readers of this blog know what non-associated multi-employer defined benefit schemes are but for the uninitiated, these are scheme including more than one employer that are unrelated (i.e. are not owned in common or under common control) where employees are promised a specific monthly payment on retirement.

What is the problem?

Like all employers, many charities have seen their defined benefit schemes go from surplus to substantial deficits. While some of the problems may have been foreseen, most were badly impacted by the financial crash in 2007 which wiped out the value of many pension scheme assets and has made it hard to generate returns to recoup losses.

These substantial deficits combined with Section 75 rules have left many charities trapped in schemes.

Section 75 rules mean that charities cannot stop accruing liabilities, for example by removing all staff from the scheme, without automatically triggering ‘cessation debt. This debt is calculated on the basis of buying an annuity for scheme members and is often far larger than the costs of the scheme on an ongoing basis.

A lot of employers that have the ability to pay these exit costs have already done so, meaning that many employers (including charities) left behind are often financially weaker than those exiting and can in some cases be left with large ‘orphan’ debts which they also liable.

This leads to the worst of both worlds. Charities cannot effectively manage their liabilities by stopping further debt accruals or restructuring their organisations. Schemes are being left with ever increasing liabilities that may, one day, be beyond the ability of scheme members to meet.

What is the solution?

CFG put together a response to this call for evidence (pdf) which brought together our experience in covering this issue for charities over many years; case studies and the views of pensions experts outlining the case for reform.

There are two things that the government can do to change the rules and benefit all parties.

1)     Remove the automatic trigger of Section 75 debt when the last ‘active employee’ leaves the scheme.

2)     Give scheme trustees and employers the chance to put in place more flexible regimes for repayment which could be staged and, provided that employers met the conditions of the plan, remove the automatic triggering of Section 75 debt.

These changes would enable charities to reduce their future exposure, merge and restructure as necessary.

We have spoken to many charities that have been affected by these rules and that would benefit from the above changes. We have also spoken with pensions providers and experts and we do not believe that there is any conclusive evidence that these would have a negative impact on schemes. In fact, they would make schemes more sustainable by helping employers manage their liabilities more effectively. Pension schemes, ultimately, depend on financially robust employers that can meet the promises made to members.

Why the government has to act now

Section 75 may not be as exciting as reforms to make pensions more flexible or providing pensions to those on low incomes that have never had them before, but it is vital for the security of hundreds of thousands of people and tens of thousands of employers.

The problems highlighted above are only likely to get bigger as more employers which can exit their schemes do so, and they leave beyond significant liabilities on the remaining scheme members (often financially weaker). The quicker reforms are put forward, the easier it will be for employers to begin managing their liabilities and the greater strength will be the underlying position of the schemes as well as their ability to deal with future risks.

CFG will continue to advocate for these changes over the coming months, but this call for evidence is an opportunity that the government cannot afford to miss.

PS. Thank you to the numerous charities that emailed DWP on reform and supported our submission – this strengthens our voice and demonstrates the importance of this issue to charities.

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