Not-for-profit employers that belong to multi-employer schemes are waiting for further guidance on dealing with debt risk that could trigger insolvency.
Industry experts have said the Pensions Regulator’s proposed code on defined benefit funding does not provide sufficient detail for companies within the not-for-profit sector, which have different growth objectives. The consultation on this guidance finished earlier this month.
How USS manages not-for-profit employers
The University Superannuation Scheme contains many charities and not-for-profit employers.
Brendan Mulkern, head of policy at USS said this is a complex area, and employers need to be kept informed about the circumstances in which an employer debt can be triggered.
In the event that an employer is unable to meet its contribution obligations, it would be considered a leaving employer and further discussion would take place regarding its legal obligations to the scheme.
Trustees may consider a number of statutory options depending on the individual circumstances of the employer and the nature of the cessation event.
“For example, if an employer debt arises because the employer ceases to employ its last active member that participated in the scheme, yet there is an intention to employ someone in the future who would be eligible for scheme membership, a period of grace notice could be used,” said Mulkern.
If there is a change to the legal structure of an institution or some kind of merger activity, then an arrangement that seeks to apportion the employer debt from the old employer to the new employer is possible, he added.
If these employers are unable to pay benefits, other participants in the scheme will become liable. This can result in fewer employers being left in the scheme to share the cost of liabilities.
Industry figures have lobbied the Department for Work and Pensions to review the way employer debt is considered within multi-employer schemes, particularly in relation to charities.
The issue has gained increasing attention over the past year as some charities have become insolvent or been prevented from merging with others as a result of swelling deficits, said Ruth Bamforth, barrister at Gordons and a member of the NAPF’s charities working group.
“If you are going to stop participating you have your debt calculated on a very conservative basis,” said Bamforth.
This can mean for some employers it is cheaper to remain in the scheme, she added.
The regulator accepted sustainable growth for employers in the not-for-profit sector can have a different meaning to those working in a purely commercial environment in its recent consultation on its DB code, strategy and funding policy.
“We wanted it to be clear we recognise this and that it is important to understand the context of an employer’s circumstances, including its investment aims, and what will constitute success for its business," said a spokesperson for the regulator.
Calculating contributions
This is an issue employers in the not-for-profit sector are becoming increasingly aware of, said Richard Soldan, partner at LCP.
The Pensions Trust’s Growth Plan asked for deficit contributions from its employers for the first time last year.
“I can see more organisations paying even more attention from next year, when new accounting rules will mean lots of charities needing to put potentially large liabilities on their balance sheets for the first time, as a result of their involvement in multi-employer schemes,” said Soldan.
For multi-employer schemes contributions need to be apportioned fairly to its participating employers, said Patrick Bloomfield, partner at Hymans Robertson.
"If you're in a multi-employer scheme it's really about the circumstances of you going bust in fairness to [other employers]," he said.
This is usually measured according to the strength of an employer’s covenant, with those that have a weaker covenant often expected to make larger payments over a shorter period of time, said Bloomfield.
However, schemes could also consider ways of preventing charities being pushed over the edge by their benefits obligations, such as contribution holidays.
An employer can stop accruing benefits without triggering section 75 debts, only if all employers in the scheme agree to follow suit, which may not be possible.
