Some of the worst-funded not-for-profit scheme sponsors are unable to cease future accrual or limit future membership as defined benefit affordability continues to pose a threat to the sector.
Participants in multi-employer schemes are subject to admission agreements and cessation debts, hampering sponsor efforts to cap their liabilities.
A Hymans Robertson study found that just 43 per cent of sponsors in the charity and not-for-profit sector have closed their schemes to future accrual as at 28 February this year, despite some FRS 102 deficits representing a significant proportion of unrestricted reserves and income.
For charities that still have open DB schemes the contribution rates that will come out of the next triennials will be eye-watering
Alistair Russell-Smith, Hymans Robertson
While the average deficit was just 16 per cent of unrestricted reserves, a tail of schemes were in worse positions, with the Barnardo's scheme deficit exceeding the charity's reserves. Five schemes had funding levels below 60 per cent.
Are sponsors trapped?
Several employers with below-average funding levels participate in multi-employer schemes such as the Universities Superannuation Scheme, which had a total fund value of £50.27bn at 31 March 2016.
Employers in such schemes are currently faced with the prospect of paying large section 75 debts to cease future accrual, while open admission agreements keep many enrolling new staff into the scheme.
"If an employer wished to exit or close to future accrual totally, they would be expected to make an upfront payment to cover their share of the current deficit based on the pension promises made to date to their employees past and present,” a USS spokesperson said.
“The deficit on exit is currently a much higher figure than continuing employers are being asked to pay to fund the scheme’s deficit on a continuing basis."
USS also confirmed that participants are expected to enrol any new academic staff and senior support staff. However, the spokesperson said that the scheme’s pooled nature should mitigate risks to employers.
“This allows stakeholders to take a long-term approach to managing the scheme, and also means that inherent risks like investment returns and longevity are pooled across the sector, to their collective benefit,” the spokesperson said.
David Davison, head of public sector, charities and not-for-profit at consultancy Spence & Partners, said the cost of membership and accrual is now becoming significant for sponsors.
“Clearly this is particularly becoming an issue under auto-enrolment with charities forced to use USS as their auto-enrolment default for these staff, thereby increasing costs and liabilities,” he said.
“Contributions are 18 per cent employer and 8 per cent employee, so you can see why employers may not want to use it as their auto-enrolment vehicle.”
Government's response delayed
A government consultation on relaxing s75 closed earlier this month, after participating employers had told the Department for Work and Pensions that paying the debt could see them become insolvent.
The draft regulation introduced deferred employer debts, allowing employers to cease accrual but pay off their debt gradually. Similar arrangements have already been allowed for employers participating in the Local Government Pension Scheme.
A DWP spokesperson confirmed that the response to the consultation would be delayed as a result of June’s snap election, and would be “a matter for the new government to decide”.
For Kirsty Bartlett, partner at law firm Squire Patton Boggs, challenges remain with the proposed regulations.
“The remaining employers are potentially at risk of having to pick up part of the liability for those who are allowed to leave,” she said.
She sympathised with multi-employer schemes like USS, whose ability to provide attractive benefits to members involved in public service is largely predicated on its pooled structure.
Government's s75 proposals are a 'missed opportunity'
Experts have welcomed the government’s recent consultation proposing a new deferred debt arrangement for employers in multi-employer pension schemes, but concerns over complexity of employer debt regulation remain.
“Employers are going to have to give up a degree of control, otherwise you’re just not going to get those types of efficiencies,” she said.
The wider picture
At 86 per cent funded on average, DB cost does not appear to be universally unmanageable for charity employers. But Alistair Russell-Smith, partner at consultancy firm Hymans Robertson, said that the cost of future accrual had increased on previous years.
“For charities that still have open DB [schemes], the contribution rates that will come out of the next triennials will be eye-watering,” he said.
He voiced support for the government’s proposed measures on s75 debt, but said that university sponsors may not be unhappy about continuing to enrol new staff, owing to the recruitment and retention benefits of doing so.
Russell-Smith pointed to the average 60 per cent allocation to growth assets as a sign that schemes are taking excessive investment risk, perhaps to minimise funding pressures on charity sponsors.
“There is some pressure to work the assets hard to pay off deficits. I think what we’re putting out here is that quite often that’s not necessary,” he said, advocating a low-risk, long-term journey plan.
This article was updated to reflect the date of USS's valuation.
