Many leading charities will be reeling from the recent announcement from The Pensions Trust that they face significant shortfalls in a pension scheme which they had originally believed to be a defined contribution arrangement. The Growth Plan 3 (“GP3”), which for many charities was seen as a safe haven for fixed contributions and the provision of members AVC savings has now allegedly been impacted by the high court judgement recently handed down on the Bridge Trustees case and resulting legislation expected to be forthcoming from the Department of Work & Pensions (“DWP”).
This will undoubtedly be unwelcome news and cause major problems for around 500-600 organisations participating in GP3.
The Pensions Trust has consistently communicated to participants that it believed that GP3 was classified as a defined benefit scheme as a result of the capital guarantee, (which purely guarantees that the return covers the scheme admin costs – i.e. that the fund value can’t fall), and as such they sought to ring-fence GP3 funds to cover the guarantee by investing in monetary vehicles to provide “security and capital preservation.” To quote the August 2006 Growth Plan Bulletin, “Now that Series 3 assets had to be matched to Series 3 liabilities the promise that a member’s fund could not decrease in value had to be reflected in the Series 3 investment strategy.”
The suggestion in the recent correspondence to participants is that the judgement on the Bridge Trustees case would make GP3 a defined contribution arrangement but that the expected legislation from the DWP would once again return it to defined benefit status – so back where we started.
In 2006 the actuarial advice was that GP3 funds matched GP3 liabilities and that therefore the whole of the deficit with the Growth Plan ‘family’ related to Section 1 (“S1”) and Section 2 (“S2”) benefits. The Trustee now looks to be re-apportioning the liabilities from S1 and S2 to GP3 employers.
The rules of the Scheme allows the Trustee to apportion the deficit as they see fit and until now the Trustee has decided not to apportion the deficit from S1 and S2 to GP3 as this reflected the reality of where any deficit was built up. If there is a shortfall in the funding / investments of GP3 then employers would be liable for any funding required to rectify this, but to suggest that employers should pick up a cost for the other sections by extending it beyond this must be inequitable and highly questionable.
Key questions which organisations need to consider are:-
- Has there been a negative return in the GP3 monetary investments such that would have produced a GP3 deficiency and if so to what extent?
- Is there now actuarial advice that part of the deficit has resulted from GP3?
- Is it expected that the new legislation will affect the Trustee’s power to apportion the deficit?
- If the answers to these questions is no, why has the Trustee changed their approach?
Also, it is understood that the expected legislation will be retrospective, however, we find it difficult to understand why The Pensions Trust are suggesting that it will impact on employers who have withdrawn from the Growth Plan since 1997.
- As GP3 did not exist until 2001 how is this possible?
- Was the Growth Plan not in surplus on an MFR basis prior to September 2005 when the multi-employer debt on withdrawal regulations was changed to the buy-out basis?
A major concern must be that The Pensions Trust are utilising the expected legislation to spread the deficit/additional contributions across more employers. Can The Pensions Trust provide assurance that Growth Plan 4 (“GP4”) is completely segregated and that under no circumstances could the Growth Plan deficit be apportioned to GP4 funds or GP4 funds used to subsidise earlier Growth Plan incarnations?
The other question which raises its head here is does this apply to any other arrangements within The Pensions Trust stable where they have Trustee power to re-apportion liabilities, namely those where defined contribution arrangements have been established under existing defined benefit documentation? I think that organisations have a right to understand this to allow them to consider any potential impact.
The problem now is that participants in this scheme are subject to the worst of all possible worlds – a scheme with assets not keeping pace with inflation which means employers’ risk rising discontentment from their scheme members, an employer requirement to fund a deficit which often relates to a scheme to which they had not made any contributions or to liabilities built up by other participants and an inability to exit the scheme as a result of a change of practice which imposes more significant level of debts.
I understand that there is a Growth Plan Employers Consultative Group (“GPECG”). If the GPECG has not already considered this issue then they really should do so soon and in detail. Participating employers should also consider if they are appropriately represented on the committee of the GPECG, i.e. does the GPECG committee consist mostly of employers with large historical S1 and S2 liabilities (who are likely to benefit from the deficit been spread over GP3) or is there adequate representation from those employers who did not commence participation in the scheme until after October 2001?
In the recent letter The Pensions Trust suggested that employers seek independent advice and supplied some suggestions while helpfully commenting that they weren’t really supplying them – the old ‘think of an elephant’ phrase comes to mind!! They didn’t however suggest that employers should consider legal advice to ensure that there wasn’t an alternative version of the situation which might be contrary to their assessment. I would think that this was essential.
This will undoubtedly be really problematic for many organisations and they need to gain a level of clarity as quickly as possible and preferably using a consistent, independent and cost effective approach.