Pension deficits, cakes and themed undergarments – the incorporation conundrum

David Davison

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I was trying to think of what constituted a really bad idea. My wife kindly suggested a few examples. Apparently, buying your significant other the book of the latest diet craze, however well intentioned, is likely to be counter productive. Equally bafflingly, she suggested that themed undergarments are also a bit of a no no.

In the financial world we’ve seen a few examples of late, sub-prime mortgages (I know its easy to say it now, but how could it ever have been a good idea to lend money to people with no income?). Banks run by grocers. Gordon Brown.

It strikes me that nobody ever actually intends an idea to be bad. Usually something is thought of as a good idea by somebody clever enough to persuade others of his or her view, but unfortunately not clever enough to spot what usually turns out to be the fatal flaw.

Presumably the people who invested with Bernie Madoff did so on the basis that it was a good idea.

The difficulty is spotting the fatal flaw using foresight rather than hindsight. There is a particular good idea out there at the minute where we can, perhaps, bring some foresight to bear.

Many unincorporated organisations are not surprisingly, given market circumstances, actively considering incorporating to benefit from the limited liability status such a move would afford. It’s a pretty uncomfortable position to be a partner or trustee of an unincorporated body with all the exposure to unlimited liability that entails.

Many small charitable and not-for-profit organisations are being actively encouraged to consider incorporating and, at face value, for many this seems an idea which, had it been a cake, would have been one of Mr Kipling’s. But !!FATAL FLAW ALERT!! – great care is needed when the entity seeking to incorporate participates in a multi-employer pension arrangement, such as local authority pension schemes or arrangements offered by the Pensions Trust. A move to incorporated status is unlikely to be as simple or as good an idea as it first appears.

A change of status for participants in multi-employer schemes is likely to trigger a cessation event thereby crystallising any debt due under the scheme immediately from the point of incorporation. This wouldn’t just be the on-going debt or that shown under FRS17 disclosures but the Section 75 debt (equivalent to the cost of securing accrued liabilities) which could be many times the level of debt shown in the accounts. Such a move could be catastrophic for the organisation concerned as the level of Section 75 debt often exceeds the total value of the organisation.

Great care is needed in this area and seeking expert legal and actuarial advice is an exceedingly good idea prior to any decision to incorporate being taken.

For more information in this area contact David Davison

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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