Finance News: Charities fear 'unfair' impact of Pension Protection Fund Levy

Charities are concerned that a government scheme to protect members of final-salary pension schemes could penalise them unfairly.

The Pension Protection Fund Levy is designed to fund pensions for members of defined-benefit schemes whose employer firms have gone bust. About 10,000 pension funds will be subject to the levy when it is introduced in April next year.

But major charities are worried that they could be overcharged because the method of calculating the levy is based on the insolvency risk of profit-making companies, not of voluntary organisations.

Organisations will be assessed according to their credit ratings, but charities don't have credit ratings because they don't raise money from capital markets. Credit ratings are also based on profitability, which cannot be applied to charities.

Ian Theodoreson, director of corporate resources at Barnardo's, said it was right that charities with final-salary schemes made a contribution to the protection fund. But he added: "If they get this wrong, it will knock a big swathe through what we do as charities."

Charles Nall, corporate services director at the Children's Society, warned: "For large, mature schemes of financially shaky charities the levy could be a lot of money, potentially 5 per cent or more of turnover.

"The levy is a worthy aim, but risks adding to other multiple pension whammies on employers. Charities are good employers as well as sound businesses. Measures designed to redress poor practice in the for-profit sector should not penalise charities."

Theodoreson is heading a working party set up by the Charity Finance Directors' Group and the Charities Consortium to address the issue.

Earlier this month he met credit-rating agency Standard & Poors to discuss whether charity-specific credit-rating criteria could be developed.

It is thought that these would include examining charities' balance sheets and cash flows.

Theodoreson said the working party wanted to approach the Pension Protection Fund Board with a potential solution to the problem. In a consultation document published in July, the board said that charities and not-for-profit organisations will definitely be charged the levy.

FACT FILE

Major charities are concerned that a scheme to protect final-salary pensions will hit them unfairly.

The Pension Protection Fund Levy aims to fund pensions for members of defined-benefit schemes whose firms have gone out of business.

The method of calculating the levy is based on the insolvency risk of non-profit making companies. Organisations are assessed according to their credit ratings, which charities do not have.

Discussions have taken place to examine the possibility of charity-specific credit-rating criteria.

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