Insolvency in the charities world – the pension scourge

Pensions can be a real headache for charities, and for some the burden of meeting the pensions deficit puts too much of a strain on already stretched resources. What should charities be mindful of?

Pension deficits are by no means the only concern for charities, but they present a severe headache.

There are over 180,000 charities registered in England and Wales, employing around 2,660,000.
Between them, the Charities Commission has reported a combined pensions deficit of over £3.4 billion. For some charities, the burden of meeting that deficit puts too much of a strain on already stretched resources.

The Spirit on Enniskillen Trust was an unincorporated charity that participated in the Northern Ireland Charities Pension Scheme. The terms of that scheme were that if one charity ceased to make contributions, the liability to meet those contributions fell on the remaining members. Unfortunately, the consequence of one charity leaving the scheme meant The Spirit of Enniskillen Trust became saddled with a £230,000 liability it stood no chance of meeting.

Knowing how to address this concern is not easy for trustees, because not all of the charity's assets are likely to be available to use to deal with the general debts and liabilities of the charity. However, even when an incorporated charity has entered into an insolvency procedure, the question of what is available to creditors can still be less than straightforward.

There can be no better example of this in operation than the demise of the Wedgwood Museum. Young & Another v HM Attorney General & Ors concerned the Wedgwood Museum Trust Limited, incorporated in 1962 to hold various historical artefacts the Wedgwood family had collated or been gifted over 200 years.

When the Wedgwood group was placed into administration, a question arose over whether the assets of this subsidiary were available to meet the entire group pension deficit of £134.7 million.

What the issue turned on, ultimately, was whether or not a special charitable trust had been created. In this particular instance, most of the collection had been gifted by its parent company under a Deed of Gift in 1964. There seemed to be little doubt that the reason for that was to protect against the risk of the parent company becoming insolvent. However, the Deed of Gift made no mention of any trust being created. The Company’s articles of association allowed it to support and establish charities, but there was no evidence that it ever created a special charitable trust. Therefore, the assets were to be treated like any other corporate asset, and realised for the benefit of creditors.

It would have been unthinkable when the company was set up in 1962 that these historic artefacts could be sold off in such a way. The judgment refers to this extract from Re ARMS (Multiple Sclerosis Research Limited):

“It seems to me that the general purposes of a company while it is solvent are the purposes identified from time to time in its memorandum and articles of association, subject in the case of a charitable company to any special incidence of charity law. Once the company goes into insolvent liquidation then its general purposes change and are governed by the insolvency legislation”.

Ultimately, the Wedgwood Museum became a casualty of what has become known as the last man standing rule in s. 75 Pensions Act 1995. Under this section, the last employer in a multi-employer scheme becomes liable for the entire debt owed by all participating employers. There was no equivalent in existence in 1964.

The Charity Finance Group has highlighted the need for the Pensions Regulator to recognise that charities should be treated differently to private enterprises – they are geared at fulfilling their charitable purposes and not generating growth or profit and consequently there ought to be exemptions to rules such as “last man standing”.

It remains to be seen if, and how, this is taken on board. Until it is, the scourge of the pension remains.

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