This month, the Charity Finance Group launched Navigating the Pension Maze, a report that provides an in-depth analysis of the charity pensions landscape. This comes at a critical time for the sector.
With the impact of the 2008 economic slowdown and continuing pressures on funding still being felt, pensions legislation and practice continue to represent a real threat to the survival of many organisations.
At the heart of the problem is the fact that many UK charities joined multi-employer pension schemes to benefit from risk and cost-sharing. Unfortunately, many organisations have now been left with an unwelcome legacy that has outweighed any perceived benefits. What is referred to as the "last man standing" basis of multi-employer pension schemes means that, if a participating organisation becomes insolvent, the other charities within the scheme automatically assume responsibility for any liabilities that their failed counterpart has been unable to settle.
These are known as orphan liabilities and for many schemes they now exceed 20 per cent of total liabilities. This means that the remaining charities within a multi-employer scheme could be paying £1 out of every £5 of funding towards the pensions of other, unconnected organisations.
Existing legislation does not allow employers to stop building up liabilities in these schemes without triggering a significant and, for most charitable organisations, unaffordable exit liability. This means that most of them must simply soldier on, building up ever more unaffordable liabilities.
Charities are then forced to find additional income from existing resources, which can often mean reductions in services and less funding for their charitable objects. The volatile nature of these schemes makes planning ahead difficult, and the need for additional cash frequently arrives at unwelcome times. Worryingly for charities, these issues can also affect their ability to raise funds, because few donors will want to see large amounts of their money going to pay for staff pensions. They can also stifle valuable corporate opportunities such as mergers. This situation is inconsistent, inflexible and ultimately unsustainable.
Despite all this, the problem is not insurmountable, but solving it will require government intervention in a number of key areas. The cessation liability (Section 75) legislation, which imposes huge financial penalties on charities wanting to exit multi-employer pension schemes, needs to be changed and brought more into line with the position for stand-alone schemes. The CFG has made proposals to the Department for Work and Pensions about how this could be achieved without the need for primary legislation, and this is currently being considered. Such a change would offer charities much greater flexibility in managing their costs and risks, and better protect members' benefits.
There also needs to be reform of the employer covenant assessment, which is inappropriate for not-for-profit organisations. The Pensions Regulator has agreed to look at this and come up with some proposals.
A strong and vibrant third sector is vital for the UK in both social and economic terms, so helping organisations navigate the pension maze is critical to achieving this. This publication should greatly assist organisations in identifying and dealing with the issues they face. The CFG’s Manifesto, which accompanies the Maze publication, sets out a vision for what needs to be achieved by government in the run up to, and beyond, the next general election.
David Davison is head of the not-for-profit practice at actuarial firm Spence & Partners