Following the recent introduction of new regulations to deal with pension debt, Stuart Price, Partner and Actuary at Quantum Advisory, looks into how this change could benefit charities in the UK. Stuart said: “The government has introduced a new legislation known as a ‘deferred debt arrangement’ which means that if a company who is participating in a multi-employer defined benefit (DB) pension scheme closes the scheme for its employees, it would not be immediately liable to pay any accrued debt. This could be particularly advantageous to charities and not-for-profits organisations who would find it difficult to pay a large sum of money at short notice.
“Currently a large proportion of charities offer DB pension schemes to their employees which are more generous than defined contribution (DC) schemes. However, this also means they are more costly and risky to run and many organisations have built up huge pension liabilities. If they were to close the multi-employer scheme to their employees, they would have previously triggered a ‘section 75 debt’ resulting in them having to pay their entire liabilities upon closure, which is also calculated at a very penal rate. This would create huge financial strain for any organisation, let alone a charity which has limited liquid assets.
“The new regulations, introduced in April, give companies the option to defer their section 75 debts upon the closure of the scheme, provided it is in a strong financial position and they continue to pay their regular contributions to the scheme to cover any shortfall.
“Charities can now close these unaffordable DB schemes to future accrual, introduce DC schemes – as are the norm nowadays – and ensure their ongoing pension costs and risks are manageable.”
Stuart Price, Partner and Actuary at Quantum