Chris Brown, Director, Burges Salmon

Hello and welcome to episode three of the Burges Salmon Pensions Pod, our fortnightly podcast on pensions news, insights from our practice and tips and tricks for trustees and employers. I'm Chris Brown, a director in the Pensions team. Last time we looked at the Pension Schemes Act 2021, and its impact on corporate transactions and particularly on the notifiable events regime. The episode before that we looked at initial trustee responses to the Pension Schemes Act. So if either of those sound of interest be sure to look at our website.

Helen Cracknell, Solicitor, Burges Salmon

And I'm Helen Cracknell a solicitor in the Pensions team. In today's podcast we'll be discussing the interaction between pensions and charity law.



But first the regulator's new powers have been enforced for just over a month now, and we've certainly seen trustees considering them and taking them very seriously and I, and I know others in our team as well, we've been asked whether the risk of criminal sanctions and these new regulatory powers, is that all something, Helen, that trustees really need to be worried about? I mean one trustee in a trustee meeting recently asked me, is it worth being a trustee anymore? Is it worth the risk?


That's a really great question Chris. Trustees absolutely need to be alive to the new powers, and how they impact decisions they make with their employers. But is there a material risk of extra liability for trustees who are trying to do the right thing, taking advice? We wouldn't think so. The regulator itself has said in its criminal offences policy, from September of this year, that although the offences are broad in scope, now this next section is a direct quote, "the vast majority of people do not need to be concerned. We don't intend to prosecute behaviour which we consider to be ordinary commercial activity". 


So hopefully that allows any trustees listening, who've seen a lot of the news and thought that things are getting more onerous, well they can think that they are, but if they're trying to do the right thing and taking advice the Regulator's power should not be something to be afraid of.  Of course there are some things that trustees can do to protect themselves from liability, speaking generally here.


So let me introduce our first guest, Amy Davies a Senior Associate in our Pensions team. Amy would you add anything further? What do you think that trustees can be doing to protect themselves as they go about their day-to-day business?

Amy Davies, Senior Associate, Burges Salmon

Thanks Helen, and yes that's absolutely right, I completely agree. What we're generally saying to trustees is really just to focus on a very much back to basics approach to trustee business and trustee governance and to make sure that their governance and processes are all set up and in line to make sure that the right things are happening at the right time. Focusing on particular issue, we would encourage good communication between the employer and the trustees, regular commercial and financial updates from the employer to the trustees, whether that's in writing or as a standing item for example in trustee meetings, a clear record of any discussions between the trustees and employer, any decisions made and the reasons for them. This will be really helpful in the event that you need to defend yourself against any of the criminal powers that the Regulator has, or if the Regulator decides to exercise any of its new information gathering powers, it's really important that trustees have got clear and easily available written records. And also take advice, take advice from your legal advisors, your actuarial advisors and act on that advice.


Yes that's helpful, thanks Amy. Always helpful to think about what're the basics of good trustee governance and how to run schemes properly. And just to add for some trustees we've recently reviewed what protections they have available. Exoneration rules, indemnity rules and where those pay out from, is it the employer, is it the scheme, or both? What trustee liability insurance is available, is that standalone policy or connected to a policy of the employer?


There's all sorts of things you could look at when you're thinking about trustee protections also scope of retainers with advisors and just the adequacy of governance provisions in the rules.


So onto the topic of today's podcast, Amy you have a lot of experience working with charities and other not-for-profit organisations, how do pensions obligations apply to not-for-profit employers?


Thanks Helen. The starting point really is that pensions law and regulation applies to charitable and not-for-profit employers in exactly the same way as they do for commercial businesses.


I want to introduce our second guest Catherine de Maid, a Partner in our Tax, Trusts and Family team.


Catherine is there anything from a charity law side that trustees with the charitable employer need to be aware of when approaching scheme funding or the employer?

Catherine de Maid, Partner, Burges Salmon

Yes thanks Helen. There are there are a few things, so that the trustees of any charity and that's however it's established, so whether it's established a company a trust or a charitable incorporated organisation, or CIO for short, they all owe the same duties under the law relating to charities, trusts and trustees and if they're a company also company law, so for example the trustees of a charitable company will owe the same duties as the trustees of a charitable trust, so that's quite important to bear in mind as sort of the background. And there's obviously also specific duties imposed by The Charities Act 2011, and you know for example they have to register with the charity commission and they have to generally prepare an annual reports, but it's easy to sometimes forget that it's equally important that the duties that underpin all Acts as trustees apply to charity trustees whether it's a company, a CIO or a charitable trust and the most important of those duties in this context, firstly, they have to ensure that the charities assets are applied only for its particular charitable purposes.


So that's sort of an overriding duty, and they've also got to act within the powers they have as trustees of the charity, whether those powers are given by their constitution or by charity law or trust law, and again they have to exercise those powers only in the best interests of the charities so there can sometimes be a difference that applies to charity compares with directors of normal companies for example where they've got a duty to obviously preserve and enhance assets for the benefit generally of their shareholders.


That's interesting Catherine isn't it, and we can already see a sort of an interesting interaction with pensions law and particularly the guidance that the Pensions Regulator gives out to

employers, which for the most part seems to be very much focused towards normal commercial activity in corporate employers, so for example many of our listeners will know that one of the Regulator's objectives, particularly in relation to funding and agreeing valuations, is to minimize any adverse impact on the sustainable growth of the employer. So we can already see that that wording doesn't really sort of cover the context of a charitable employer who are not going to be aiming at sustainable growth in the traditional commercial sense.


Yeah absolutely.


I guess the question of how the trustee should consider the charities purposes is an interesting one which trustees of pension schemes might want to discuss with their advisors.


Yeah absolutely I think that's a very good point to draw out.


Okay and so continuing on the points relating to scheme funding Catherine, I think one of the other things that I've certainly seen in in the advice that I've given to trustees of pension schemes that are sponsored by charities is that there can be some interesting issues that crop up when we're talking about scheme funding and valuations, and the way in which charities may or may not be permitted to use the assets that are available to them, can you comment on that at all for us?


Yes absolutely, and it's again it's well pointed out, because it can get forgotten but there are some fairly unique concepts which apply to the basis upon which charities hold their assets, and the basis on which they hold the asset will determine the powers and the duties they've got in relation to it. So for example it may mean that the asset in question can only be used or applied for particular charitable purposes within perhaps the wider range of purposes for which the charity has been established, and an example there would be you know a university might hold a certain portfolio of investments to pay for a particular scholarship, or it may mean that the charity's got no power to sell the asset at all, an example there would be sort of a permanent endowment.


So some of the most common examples you tend to see of those restrictions are, firstly, trust assets, so a charity asset will be designated as a trust asset if it's an unincorporated charity, so if it's a charitable trust all of its assets will be designated as trust assets. Charitable companies, so incorporated charities, their assets aren't generally trust assets but they can hold specific assets as a trust asset, and that's usually because the donor has imposed a condition or a restriction when they donated the asset to the charity, so it's always important that a charity establishes whether any of its assets are trust assets.


And then again the two types of restrictions that apply to trust assets are that an asset can only be applied for a particular purpose, and that's usually referred to as a special trust, and again the example there is the university that has to apply the income from a specific investment for a scholarship. The other one is the permanent endowment example, and that would be I suppose where, again, you could have a specific investment. So again a portfolio of investments could be given to a charity on the basis that they retain that investment permanently, so they're not allowed to sell it and dispose of the cash for its charitable purposes, they've got to retain it. But they can then apply the income generated by it for its charitable purposes, that's quite a typical permanent endowment.


That's really helpful Catherine, thank you. And I think for our purposes as advisers, primarily to trustees of pension schemes that might be sponsored by charitable employers, I think the points that I'm taking away from there are that, firstly, you need to understand what the nature of the assets are that the charities are holding. And I think one of the things that I've seen in practice as well that kind of impact on the value and practical usability of assets of a pension is for example, where you know a building or a piece of land might have been specially adapted


to further the charitable purpose, so for example if you know a disability charity might have a specially designed and adapted building which might make it more difficult to sell, or it might affect the value because it's obviously a very particular market and it might not be saleable on a general property market so that can also impact on how usable a charities asset is for the purposes of supporting the pension scheme.


Thanks both, that's a really interesting discussion and some interesting points there for pension trustees. I think what that draws out is the need for coordinated advice between pension specialists and charity law specialists. And also for coordinated advice between legal advisers and covenant, because I think the covenant of a not-for-profit, or charitable employer, isn't necessarily straightforward to determine. We've come across that in practice, we act for a number of pension schemes with charitable employers, or not-for-profit employers, religious bodies and educational institutions.


Amy, can you give us some examples of where you've seen funding solutions working in practice?


Thanks Chris. That's right, so we're for example currently dealing with a framework agreement which incorporates a number of sort of sub-agreements if you like which involve, firstly, money being put aside by the charity for funding purposes. Also charges over real estate, along with mechanisms for the release of the properties on certain funding triggers. And finally an agreement on a long-term funding objective for the scheme.


Yes bespoke solutions work well. A few years back, we helped a charity put in place a contingent contribution mechanism where essentially the covenant was monitored and extra cash was put into the scheme only if the covenant fell below a certain metric. So yes bespoke solutions work well.


There's some really interesting examples there, and there clearly are innovative approaches for charities because of the natural interaction between pensions law and charitable law. If you also go back to the Pension Schemes Act 2021, obviously there are two new tests for a contribution notice which consider employer resources and employer insolvency. It's not entirely clear at the moment how these two tests will apply in a charitable context.


I think that's absolutely right Helen, in relation to the resources test there's no guidance at all on what it means in practice for charities, how assessing the use of resources and as against the funding position of the scheme.


It would be really helpful if the Regulator could turn its mind to this, and offer some guidance in the near future for charitable employers.


We should also note the changes to the scheme funding regime under the Pension Schemes Act 2021, and the move towards a specified fast-track funding approach. It'll be interesting to see how this develops to ensure that the flexibility in the current regime is retained for charitable employers, again, going back to this bespoke funding solutions that we were talking about earlier, that's probably going off on a tangent though and probably one for a whole new podcast.


Thanks Amy. Another area that we've seen in practice is how cessation and participation in multi-employer schemes works for charitable employers, so we've helped not-for-profit organisations who've accidentally triggered debts manage those liabilities, and there are various statutory mechanisms for doing that. Including periods of grace and deferred debt mechanisms.


But in essence, trustees of schemes with charitable employers might want to do some pre-emptive work to consider what the impact of an insolvency event, or an employment cessation event, would be.


Yeah absolutely, it's a message that works in the commercial context but certainly for if you've got a not-for-profit employer as well.


So finally, Helen and I just wanted to end on an example, and the well-known case of the Wedgwood museum is a good example of some of the difficulties when dealing with charitable employers.


The museum became the last man standing in a multi-employer scheme, and ultimately its valuable pottery collection was held to be an asset of the museum to be distributed in its insolvency, rather than being held on separate charitable trusts. So this is an example of Catherine's point earlier around needing to be very clear on the legal structure of the charity and how it holds its assets. 


So, Amy, Catherine, Helen thanks very much for your time today it's been a really interesting discussion.


Thank you for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our Pensions team and how our experts can work with you, you can contact myself, Chris or any of our team via our website.


If you enjoyed this podcast you may also enjoy listening to our next episode, which will cover key trends in the current pensions landscape, with a particular focus on master trusts. This will be available on Apple, Spotify or wherever you listen to your podcasts.


Don't forget to subscribe and thanks for listening.