Charities signed up to multi-employer pension schemes face increasing funding difficulties, says expert

Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said that recent press reports had highlighted the 'Catch 22' faced by charities hoping to extricate themselves from multi-employer schemes in which their own assets and liabilities were not ring-fenced.

"The way that some of these schemes are designed, if other employers become insolvent, their liabilities get shared among those who are still members of the scheme," he said.

"Charities find it exceedingly difficult to extract themselves from these schemes. They are in a Catch 22, as leaving usually triggers an exit liability which can run into the millions and is quite frankly unaffordable for most charities. However, by not exiting, the employer's share of the 'orphan' liabilities of insolvent employers increases, so the longer they stay in the scheme the risk of having to carry these liabilities grows," he said.

Stones was commenting as the head of finance at human rights charity Amnesty International warned that pension scheme funding requirements could force charities to use donations from members of the public to meet their increasing liabilities. According to industry publication Third Sector Magazine, Iain McSeveny has written to the Pensions Minister to ask him to amend proposals that could change the type of support charities which use certain schemes would have to provide.

Employees of Amnesty International, along with employees of around 1,700 other charities, are members of a multi-employer scheme called the Growth Plan. The current scheme was originally classified as a money purchase scheme, a type of defined contribution (DC) scheme where benefits paid to members depend on the value of the underlying investment. However, the 2011 Pensions Act reclassifies money purchase schemes that contain a guarantee as defined benefit (DB) schemes. These schemes are subject to tougher funding and member protection rules, intended to ensure that members receive the benefits they are due.

If the current scheme is classified as a DB scheme, sponsoring employers could also become liable for historical deficits under two previous versions of the scheme that are closed to new members, according to McSeveny. In his letter, extracts from which were published in Third Sector Magazine, he compared the situation to "adjoining neighbours breaking down the party walls on either side of our humble abode and then declaring that we are now jointly liable for both of their outstanding mortgages".

"I have been able to speak to a number of smaller charities who are in a similar position but where the potential impact is even more serious; many either do not have sufficient reserves, or unrestricted reserves, to meet this significant and unexpected cost," he said. "I would be grateful if you would be willing to consider removing the threat to [Growth Plan] members to historic liabilities through clarifications in the awaited regulations pertaining to the Pensions Act 2011."

Pensions expert Nick Stones said that although there were some "quick fix" legal mechanisms that could be used to ameliorate the charities' liabilities on a short-term basis, a longer term solution would be impossible without a legal change through Parliament or the courts. Stones, a member of a working party discussing the issue with the Department for Work and Pensions (DWP), said that the problem was well-known to both the Government and the Pensions Regulator.