Can you describe the contents of your charity’s pension scheme? If the answer is "no", you’re probably not alone. For the majority of people, pension arrangements can seem bewildering.
But although it’s not the most compelling subject, picking the right pension scheme is vital for charities, especially when the financial consequences of failing to do so can be hugely damaging for both the organisation and the employees the scheme is designed to support. So what should charities include in their pension plans? And what traps should they take care to avoid?
The key issue from a charity’s perspective is probably avoiding defined-benefit pension plans, which promise a specified pension payment, lump-sum or combination on retirement, predetermined by a formula based on the employee’s earnings history, length of service and age. These schemes have fallen significantly out of favour in recent years because of the onerous costs involved. One look at Barnardo’s and its £142.2m pension deficit stemming from its now closed defined-benefit scheme is enough to give most charities pause for thought.
Tom McPhail, head of policy at the pensions firm Hargreaves Lansdown, says the problem for many charities is balancing the demands of donors, who want money spent on the cause, and the need for good pension schemes for employees. "I have seen instances of charities getting into deficit on their final-salary schemes, sometimes quite substantially," he says.
"Then you have a real problem: potentially the only source of funding for that scheme is donations, and that’s a very difficult conversation to have with potential donors."
It’s a given that every charity will want to attract high-quality employees who are right for the organisation, but McPhail warns: "You have to strike that balance between recruitment and always having to be accountable for how every pound raised for charity is spent."
Given the importance of being financially accountable, says David Davison, director of the pensions firm Spence & Partners, charities should be looking at defined-contribution schemes, which are far less financially risky.
He specifically recommends opting for a master trust, a multi-employer occupational scheme that allows each participating employer their own section. This also allows charities to meet their obligations under auto-enrolment pension legislation, which requires every UK employer to put staff into a workplace pension scheme and contribute towards it.
David Jessop, executive director, people, at Leonard Cheshire, says there has been a sea change in pension offerings in recent years, and charities have to adopt pension plans that can appeal across generations. Many younger people, for example, want flexibility, choice and information about how their pensions work and are performing. And a great pension scheme can attract talented staff.
But this has to be balanced with keeping the organisation financially sustainable. "I think those organisations that have addressed their pension provision so that they are sustainable and also provide a key part of the employee offer are the ones that will flourish," he argues. "Those organisations that bury their head in the sand and try to prop up schemes that are not sustainable will absolutely be in trouble, because that unsustainability will come to a head in the relatively near future."
McPhail says that boards should also be careful to avoid "careless own goals" by investing in pension funds that, in turn, put money into industries that are antithetical to the charity’s purpose, such as an environmental charity accidentally investing in fossil fuel firms.
Charities should make sure their pension schemes remain generous, notwithstanding the fact that their employees might have to survive on their pension pots for 30 years or more after retirement. But financial constraints in the voluntary sector have seen many charities look to make their pension schemes much less generous. Alan Fox, national pensions lead for the trade union Unison, warns that this is not in the best interests of staff and urges charities to do more to improve their provision for employees, including increasing awareness of the charity’s pension offering and what it means for their retirement.
"An employer contribution of at least 10 per cent within a defined-contribution scheme might give someone a chance of building a pension pot they deem to be beneficial," Fox says. "But quite a lot of employers are paying nowhere near that, which is a concern.
"I think there are a lot of people out there who, when they look at their pension statements and as they get closer to retirement, are going to question what the point was of paying into a pension scheme, because the benefits will look relatively small."
He says that one solution could be a collective defined-contribution scheme.
"If we are talking about a sector where there is not a massive amount of money about and employers need certainty of cost, a CDC scheme might offer advantages to both members and employers," he says.
"In other words, you are targeting a defined-benefit-like benefit at a more sustainable cost."
But the most important point is to make sure the charity is not groping in the dark for the right pension policy and is unafraid to hire someone to shine some light on the issue. Davison says charities should grasp opportunities to bring expertise on board to help navigate their pension options.
"If you are selecting a scheme, you are selecting one for 10 or 15 years," he says. "So it is probably worthwhile spending a bit of money at the start employing someone who understands what you require. It’s one of those things in which you need to invest in the early stages to make sure you get what you need."