A charity in Northern Ireland has announced it is closing this month, citing pension costs and a lack of flexibility in the region's local government scheme as the reason behind its insolvency.
The Rural Development Council is an employer in the Northern Ireland Local Government Pension Scheme, administered by the Northern Ireland Local Government Superannuation Committee.
RDC couldn’t get any support and they end up trapped in the scheme not being able to afford to exit and having to pay contributions which would effectively deplete their assets, resulting in a slow and painful demise
David Davison, Spence & Partners
It was set up by the government in 1991 as an arms-length body of the then Department of Agriculture Northern Ireland to support development of rural areas across the region.
After a review of public administration in 2006, RDC severed its ties with government, becoming a standalone entity. In more recent years it has registered as a charity.
A series of unfortunate circumstances
According to an update on RDC’s website, when the group separated from government, "there was no reason to believe that future pension demands would threaten the solvency of the organisation”.
In the update, chair Tony McCusker wrote that “a series of unfortunate circumstances including a substantial pension deficit, a continued annual hike in pension costs, the inflexibility of the NILGOSC pension scheme regulations and a lack of political stability have all played a part in the closure”.
He added that “we have witnessed a number of charities closing over recent years with increasing pension costs often the main contributor”.
Mr McCusker said: “For us it is extremely frustrating and disappointing that our local government pension scheme is not doing more to protect Northern Ireland charities in the way that other government schemes are across the UK. Government seriously needs to find better solutions, other than insolvency, for organisations to exit the scheme, which are more beneficial to members and to the fund in the long term.”
NILGOSC said it cannot comment on the financial management of a scheme employer, adding that in the circumstance where a scheme employer ceases to function, the pensions of members are secured and suffer no detriment.
Requests for support rejected
Teresa Canavan, RDC’s chief executive, said a creditors’ meeting is due to be held on March 28.
She said: “The extent of capital payments coupled with a much higher employers contribution rate was the sole contributor to RDC closure”.
The charity's pension deficit was estimated at just over £3m in 2016, but Canavan said the true value of cessation will be calculated on RDC’s exit.
David Davison, a director and owner of Spence & Partners and a charity pensions expert, worked with RDC to try to find a solution.
He said that when the RDC became a standalone entity, the pension position was raised as a concern but no steps were taken to deal with it, so RDC inherited all the past liabilities without any funding or guarantee.
“Over time the pension issue kept coming up but RDC couldn’t get any support and they end up trapped in the scheme not being able to afford to exit and having to pay contributions, which would effectively deplete their assets, resulting in a slow and painful demise,” Mr Davison said.
He added that the RDC board did everything in its power to address the issue – by engaging with politicians, civil servants and NILGOSC.
They also sought a guarantee from the Department of Agriculture, now known as the Department of Agriculture, Environment and Rural Affairs, but Davison said this was refused and there were no legal grounds to challenge.
A spokesperson for the Department of Agriculture, Environment and Rural Affairs said: “RDC asked the Department to guarantee a potentially considerable liability for which DAERA has no contractual responsibility."
The spokesperson said approval would have been needed from the Department of Finance, and "that there was no reasonable basis upon which to make such a request for permission to guarantee”.
Rules too rigid
He described the Northern Ireland local government rules as very prescriptive, meaning there was no option to enter into some sort of compromise with RDC.
Moreover, Northern Ireland has been without a parliament for two years, meaning there is no minister to refer the issue to.
“If you’d have had a minister in Northern Ireland who was responsible for these sorts of services, then potentially they could have taken a political decision to provide a guarantee or provide some security or instruct a department to actually provide some form of a guarantee – or been involved in the whole negotiation process,” he said.
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When RDC became a standalone entity after the 2006 review, rather than it being a transfer from one employer to another, for example, it involved a change in organisational structure or ownership. There was no requirement to reapportion liabilities, Mr Davison noted.
However, he argued that what has happened to RDC highlights that by not having that requirement, “this is the sort of risk it creates, because if liabilities are moved from one organisation to another – which means that ultimately on exit they’re a much higher value – then that potentially creates a big problem for the organisation that actually assumes them”.
In a private sector scheme, if there was a difference in ownership, structure or governance, the scheme would be required to take into account the change of covenant and how it receives funding, he highlighted.
“Obviously we wouldn’t have had that back in 2006, but it just highlights the problems that it creates – the fact that we don't.''
Closure only option
Ms Canavan echoed this view, noting that the inflexibility of the NILGOSC scheme meant that there was no other option for RDC other than closure.
“No matter what suggestions there simply wasn't any solution, no negotiation method to allow you to give over all assets and exit without closure,” she said.
“Essentially we were asked for a letter of guarantee from government, in the end this would have required a minister, so lack of government impacted here, but in reality once you inquired more, even with a letter of guarantee we would still have been asked for substantial capital payments,” Ms Canavan added.
She said there is a general lack of understanding of how charities and not-for-profits work.
“There were many assumptions, or at least it seemed that way about our ability to raise capital despite explaining that the majority of our contracts were based on actuals – so money in, money out, with no ability to claim for deficit payments,” Canavan said.
Charities struggle
Kirsty Bartlett, partner at law firm Squire Patton Boggs, said that if an employer is an admitted body to an LGPS fund as a result of outsourcing or transferred services by the council, then usually the former public sector employer – such as the county council – would take some responsibility.
“If they have entered into the outsourcing contract then as part of that they would… normally be expected to pick up the liabilities if the employer went bust,” she said.
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Ms Bartlett highlighted that there are separate rules for Northern Ireland LGPS, but that there is a limit to how flexible the LGPS regulations can be anywhere in the UK.
“I am aware that there are a number of charities participating in not just the LGPS but actually some private sector schemes as well – where pension costs are a really important part of the costs that they face and sometimes, sadly, they become unmanageable,” she said.
