Pension termination debts: Light at the end of the tunnel?

In defined benefit pensions schemes, the risk that there are insufficient funds to meet the costs of paying a pension at a promised level to a retired staff member falls on the employer(s). In recent years the combination of falling investment returns, people living longer and changes to the tax regime have mean that regular employer contribution rates have risen and deficits have increased significantly. In multi-employer defined benefit pension schemes and in the Local Government Pension Scheme (LGPS), where an employer ceases to have active members in the scheme and there is a deficit, then a termination debt is triggered. These debts can be very significant, often running to millions of pounds.

In a world where funding is increasingly difficult, many charities would like to pull out of these schemes. A paper by the Charity Finance Group earlier this year indicates that 75% of charities would either consider closing or would definitely close access to their multi-employer pension scheme if they didn’t face an immediate termination debt. The dilemma that many face is wanting to reduce their future costs to ensure sustainability but not being able to afford a significant immediate payment without doing serious damage to their current operations. However, efforts are being made to find a way out of this vicious circle.

In March 2015 the Department for Work and Pension (DWP) issued a call for evidence on termination debts in non-associated multi-employer schemes. This canvassed views on whether there might be occasions where a less stringent (and less expensive basis) of calculating the termination debt could be used – for instance where the employer can show that it has a strong covenant (or likelihood of being able to pay). It also asked whether the rules might be relaxed so that no debt is triggered when there are no longer any active members. The suggestion was that employers would continue to make regular contributions. This would allow employers to stop accruing future liabilities without facing a very large one-off payment.

A recent report prepared by PWC for the Local Government Association and the Shadow Scheme Advisory Board for the LGPS (SSAB) made similar suggestions and recommended a consultation on a change to the scheme regulations to allow more flexible exit arrangements. This wasn’t specifically picked up in the SSAB’s recommendations but they did indicate that this should be given further consideration by the new Scheme Advisory Board.

The recognition of this issue by the DWP and the SSAB is encouraging. Whilst there are obviously concerns about ensuring pension schemes are appropriately funded, which is doubtless the reason why this is being approached cautiously, it does give suggest a more pragmatic approach could be taken.

For advice on the LGPS or other defined benefit pension schemes, contact Doug Mullen on 0121 212 7432 or douglas.mullen@anthonycollins.com.

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