FINANCE: Don't mention the pension


Both charities argue that money purchase schemes can be more suitable for many staff and that they are contributing above the recommended level.

"The recommended employer contribution to build a decent pension is 7 per cent and we're putting in 8.5 per cent,

says Age Concern communications director Neil Churchill.

He says that for people who move jobs every few years, which is becoming increasingly common in the voluntary sector, money purchases schemes are more easily portable.

Kavanagh reiterates this argument: "Our new scheme is more up-to-date, particularly as staff often only work here for three or four years before moving on."

He adds that the flexibility of the money purchase scheme means it is easier to offer options such as ethical pensions.

Kavanagh does not believe the change will damage recruitment. "The new scheme is a good one and we don't anticipate any resentment among new staff as they will know what pension scheme is in place before they join."

He adds that staff were kept informed during the process and there was a period during which staff not previously eligible for the final-salary scheme could join it.

"We also involved the union Amicus in helping design the new scheme,

he says.


There is no accurate data on the number of charities that have final-salary pension schemes. But, according to estimates by the Charity Commission, 1,500 to 2,500 registered charities are believed to run such schemes.

This swells to up to 5,000 if other organisations with charitable status, such as universities and colleges, are included. However, staff at around 1,500 of these charities are thought to be in multi-employer schemes, such as those run by local authorities or teachers' funds, and may therefore enjoy greater protection.

As to how much in pension assets is held by charities in final-salary schemes, Peter Warrington, executive director at portfolio investment research company WM, estimates the total at around £2-£3 billion.

The poor stock market returns of recent years have had a significant impact on the health of final-salary schemes, whether in the public, private or voluntary sectors, as most funds are 70-80 per cent invested in equities.

Robert O'Donovan, employment lawyer at RadcliffesLeBrassuer, says: "The stock market is down 30 per cent in the past three years so even a scheme that was looking healthy in 1999 will have been hit hard."

Falls in the stock market have forced some charities to shut their final-salary pensions schemes, and many others to ask whether they should follow suit. So where does this leave staff? Patrick McCurry reports.

It may seem ironic that Britain's two biggest charities for older people are shutting their final-salary pension schemes for new staff.

But the move reflects growing concern in the sector about whether charities can afford to pay pensions that are linked to the salary an employee is earning at retirement.

So far, Age Concern England, Help the Aged and Save the Children have bitten the bullet and are now only offering new staff "money purchase

schemes, in which the pension paid carries no guarantees and will depend entirely on investment performance.

Others, such as Oxfam, RNLI and the YHA, are reviewing their final-salary schemes, in which the employer has to foot the extra bill if stock market performance is poorer than predicted.

The drivers behind the abandonment of final-salary schemes are the under-performance of investments in recent years and the fact that people are living longer, which means employers face higher costs in guaranteeing pension values. Other reasons include the Government's abolition of tax relief on share dividends and new accounting rules that will force employers to disclose their pension scheme's surplus or deficit on their balance sheet.

The charities that have so far announced radical changes are following a trend already established in the corporate sector.

Peter Warrington, executive director at portfolio investment research company WM, predicts that in five years' time the only final-salary schemes that will still be open to new employees will be in local authorities or those linked to the state such as civil servants or hospital staff. "A study carried out by the Society of Consulting Actuaries found that of 3,000 private-sector employers, 70 per cent had closed their final-salary schemes,

says Warrington.

"Volatility is a key issue in all this,

says Robert O'Donovan, an employment lawyer at RadcliffesLeBrasseur. He notes that money purchase schemes allow employers to plan their contributions, while with final-salary schemes there is always the risk that a fall in the markets may result in the employer having to increase payments into the scheme. "Effectively, it's a way of reducing pay and some staff are beginning to wake up to this but it's probably too late,

says O'Donovan.

However, not all voluntary organisations are affected by the changes, only those that pay pensions linked to final salary and that often means the larger charities. The Charity Commission estimates that up to 5,000 charities are involved in some kind of final-salary scheme (see box right).

In charities that offer such schemes, not all staff have taken advantage. For example, at Help the Aged fewer than a third of staff have chosen to join the final-salary pension.

Among the reasons the charity gives for this is that many lower-paid employees feel unable to afford a contribution of at least 6 per cent of their salary, and many staff expect to move on after a few years.

Despite this, there is still a reluctance to abandon final-salary schemes, which are seen as a valuable employee benefit and a tool in recruitment and retention. Alan Sharpe, finance director at RSPB, says: "We value our pension scheme highly and there won't be a knee-jerk reaction because of falls in the stock market."

He adds that charity salaries are generally below the market rate and that therefore an important benefit such as a final-salary scheme has helped ease recruitment problems in the past. On the other hand, he says, the pressures on pension costs mean no charity can unconditionally state that it will continue with a final-salary scheme. "It's something we will be scrutinising regularly,

he says.

A key issue, of course, is that charities must weigh up the costs of the benefits to staff against the expectations of beneficiaries and donors. It can be argued that supporters will be less likely to donate if they believe an ever-growing proportion of their money will be earmarked for staff pensions.

But some in the pensions industry believe that the charities that have closed their schemes have acted too hastily. Richard Stroud, chief executive of the Pensions Trust, which manages £2 billion of pension funds for charities, supports this view. "Charity finance directors have been told by pensions consultants to shut final-salary schemes for cost reasons. It's seen as an easy option,

he says.

Stroud believes there has been an over-reaction to the poor stock market performance of the past three years. "I've been in this industry 39 years and seen a lot of ups and downs in the market.

He adds that a lot of employers have short memories.

When the markets were up many took contributions "holidays

because their pension schemes showed a surplus but now they are looking for a way out since the markets are down.

Chris Ball, voluntary-sector secretary at trade union Amicus, agrees: "Charities need to take the rough with the smooth."

He believes that shutting schemes may provide short-term cost benefits but will lead to future problems.

"When new staff join and then realise they're on inferior benefits to their colleagues that will damage morale,

he says. "Good pensions have been one of the few ways charities have been able to retain staff, so it's enlightened self-interest for employers to retain such schemes."

Stephen Bubb, chief executive of Acevo, says that charity staff are faced with a "double whammy

because not only do their salaries trail other sectors but now they could lose the prospect of a decent retirement income.

"It's another example of the growing inequality between the voluntary and public sectors,

says Bubb.

He blames the general under-funding of the voluntary sector for forcing many charity directors to review their pension commitments."Many charities would love to offer final-salary schemes but they face big cost pressures thanks to the under-funding of their core costs and of the overheads on contracts they deliver,

he says.

Stroud argues that the charities that are concerned about the costs of their pensions should consider other options besides the closure of final-salary schemes. So-called hybrid pension schemes, in which the pension is calculated on lifetime earnings average, rather than the final salary, is one option. But he claims that the pensions consultants that advise charities to adopt money purchase schemes sometimes receive commission and therefore they are unwilling to recommend other options.

This claim is disputed by some charity finance directors. Nick Kavanagh, finance director at Save the Children, says the adviser it used did not receive any commission on the money purchase scheme launched and that the new fund provider was chosen after a tender.

For those charities that are concerned about the new disclosure rules, known as FRS 17, there are multi-employer schemes, says Stroud, in which several charities come together to provide a pension. "That means the assets and liabilities are commingled and therefore do not have to be disclosed in the charities' balance sheets,

he says.

This would avoid the scenario of a charity being misunderstood when it disclosed a large pension asset or liability in its accounts.

"What worries employers is that FRS 17 will show short-term changes in the value of a long-term pension commitment and that members of the public or funders may misunderstand the numbers,

says Ray Jones, policy accountant at the Charity Commission.

For example, he says, a funder or donor could see a large asset on a charity's balance sheet but not understand that this was related to long-term pension commitments and therefore conclude that the charity was wealthier than it in fact is.

Alternatively, charity trustees could become unnecessarily alarmed at a pension deficit and slash spending on charitable activity, when in reality all that may be required is to increase pension contributions over the long term.

"It's essential that people understand what these assets and liabilities represent,

says Jones, adding that the Commission has issued guidance on the matter in its Charities SORP - Update Bulletin 1.

Only a small fraction of charities have final salary schemes and even in those charities many, sometimes the majority, of staff have chosen not to participate because they feel they cannot afford the contributions.

The alternative the Government has been promoting is the low-cost stakeholder pension but there is no obligation on workers to sign up. "Many charities now offer stakeholder pensions but the fall in markets means there's no guarantee these will provide a decent pension,

says Acevo's Bubb.

This is all very worrying, says David Sinclair, policy officer at the Charity Finance Directors' Group.

The controversy surrounding final salary schemes must be seen in the context of why so many charity employees are not making any provision for their old age.


Save the Children and Age Concern both cite cost controls and stock market volatility as the main reasons why they have closed their final-salary schemes to new staff. Both charities now offer money purchase pensions to recruits.

About 40 per cent of Save the Children's UK workforce and the majority of Age Concern's staff were in the final-salary schemes.

According to Age Concern, falling investment returns meant it faced the prospect of having to contribute 16.5 per cent of the salaries of staff in the scheme and that it could not justify using its resources in this way.

Nick Kavanagh, finance director of Save the Children, says: "Small changes in the stock market can mean big swings in the value of the pension fund."

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