Charity employers with staff in government multi-employer, defined-benefit schemes could see their pension bills rise by more than 10 per cent after the abolition of a national insurance concession, announced in the Budget today.
Employees can currently receive both a basic old-age pension and a state second pension.
Employees in government schemes currently receive a concession, usually worth between 2 and 3 per cent of the employer’s total payroll, because the second state pension is ‘contracted out’, meaning that the employer is responsible for its provision.
But the government today announced plans to introduce a single-tier state pension from April 2016, a year earlier than expected, meaning this concession will be scrapped.
There are believed to be between 1,500 and 2,000 charities with members in pension schemes run by local government, the NHS and central government departments, usually because they have taken on staff from a government body as part of a contract. All these organisations are likely to face an extra bill as a result.
David Davison, a pensions expert at the pension specialists Spence & Partners, said the change could cost these charities somewhere between £20m and £30m.
He said these schemes often already required employers to make contributions worth more than 20 per cent of employees’ salaries, which many charities struggled to afford.
"These charities could see the costs of providing pensions rise by a tenth or more," he said. "It will be extremely difficult for them to manage, because many of them are already facing very high pensions contributions and substantial deficits as a result of these schemes."
He said most of the charities affected were medium-sized organisations, typically with between 10 and 100 employees. "A typical organisation might have to find another £20,000 a year," he said.
The Charity Finance Group and Davison have been lobbying government for changes in the law to make it easier for charities to manage the debt from multi-employer, defined-benefit schemes.
The Budget also introduced a duty on the Pensions Regulator to support funding arrangements for such multi-employer schemes that are not so onerous that they would prevent an employer from growing.
Caron Bradshaw, chief executive of the CFG, said the move could be "a useful lever to achieve more flexible pension arrangements for charities". She said the announcement was "a useful first step, but more needs to be done on multi-employer, defined-benefit schemes".