The voluntary sector has traditionally supported its staff with pension schemes, many of which have a defined benefit element.
Many organisations with defined benefit schemes in deficit are subject to deficit reduction plans, which require separate payments over a number of years to be made in addition to normal contributions. This places extra strain on organisations struggling to increase income while maintaining service delivery. Charities may become technically insolvent where their scheme deficit is in excess of their unrestricted reserves. This can occur not only where the full amount is taken on to the balance sheet, but also in the case of “multi-employer” schemes. Those schemes (without segregated assets and liabilities where the value of the additional payments under reduction plans) must be accrued under new accounting rules to be in place from 2015.
Multi employer scheme participants are also vulnerable to having to meet the liabilities of fellow scheme members under the “last man standing” rules. If the other members’ debt cannot be recovered, this debt is shared amongst other participating employers and there is increasing concern that this could create a potential “domino effect”.
In the event that a member of multi employer scheme stops participating in the scheme, their debt becomes due and payable at that point and must therefore be accrued in full. This crystallisation debt is significantly higher than the ongoing liability, which can have a significant impact on reserves. This “crystallisation” of the full employer debt may also occur where charities amalgamate or change their legal form.
A further pressure on pension scheme commitments will arise when charities commence compliance with auto-enrolment and increasing employer and employee National Insurance Contributions from 2016.
For charities with their own pension schemes, or where assets and liabilities can be segregated, recovery of deficit can be factored in to planning, and schemes closed to new members or changes made to contributions or benefit accrual.
In the case of multi-employer schemes however, deficit recovery options are far more restricted. Although the Charity Finance Group has lobbied the Government to consider changes, nothing has been agreed to date.
In the event of a “yes” vote for independence, the latest EU ruling means that cross border schemes, of which many charities participate, would be required to have fully cleared their deficit on the day of independence.
Chiene + Tait Financial Planning has worked with a number of charities to provide independent guidance on the above, and should you wish to discuss your organisation’s scheme, please get in touch with Gordon Birrell or Mark Dobson on 0131 558 5800 or email email@example.com.