The little publicised change in the accounting treatment of defined-benefit pension schemes in the revised charities Statement of Recommended Practice, FRS102, is potentially catastrophic. The pensions liability issue has been at the centre of many discussions, but the way in which the balance sheet is presented could have a critical impact on some charities’ reputations and, consequently, their longevity.
The new requirement to account for any pension fund deficit within the annual financial statement is likely to have the greatest impact on charities that are bringing in defined-benefit pension schemes for the first time, particularly those with multi-employers, where the liability has previously been buried in the notes. The inclusion of this liability might be sufficient to make the balance sheet negative, which will raise concerns with regulators, funders and beneficiaries about the solvency of the charity, its ability to continue as a going concern and the use of donors’ money to pay former employees, rather than current charitable activities. Even if charities emphasise their ability to meet the liability in the long term, the underlying implication of these deficits will not be attractive to funders or donors, who are already sensitive to the issues of solvency after the Charity Commission warned about the dangers of having low reserves in its revised guidance, CC19.
Furthermore, given the current public interest in the pension deficits of corporations such as BHS and Tata Steel, it is hard to imagine an increase in the number of charities suddenly reporting such liabilities going unnoticed by the press, and negative press stories only make fundraising harder.
So although trustees might be confident they can manage the long-term cash implications, they must be vigilant in how they present the issue in their accounts – including the trustees’ report, the reserves policy and the new going-concern note – to ensure that the charity is presented in the best light.
There are various options for addressing the issue. For example, many charity accounts depict assets at well below their market value, the costs having been included many years previously. Those assets could be revalued, using the benefit of the transitional rules under FRS102 to ensure that the effect of the inclusion of the pension liability is moderated as far as possible.
If the defined-benefit pension scheme is too expensive, trustees should take professional advice about controlling or mitigating pension costs. The complexities of multi-employer defined-benefit schemes mean it is easy to unintentionally increase the short-term contributions significantly or inadvertently trigger a cessation debt. Specialist advice is essential.
Finally, if costs cannot be adequately controlled, some charities, such as Disability Rights UK, have approached the Pension Protection Fund to see if these liabilities can be mitigated. Although this action does have financial and reputational consequences, action might be required to avoid insolvency and the loss of the charity’s work.
The alternative of seeking a merger with another charity is often impossible because of the very existence of such pension scheme liabilities. It is therefore imperative that trustees consider this issue very seriously and in a timely manner to minimise any damage.
Neil Finlayson is head of not for profit at the chartered accountants Kingston Smith