NEWS IN FOCUS: Charities caught in ethical dilemma on staff pensions

Mathew Little

This year's market recovery is causing charities to review their staff pension schemes. Mathew Little examines the contrasting approaches to staff benefits.

In 2002 charities aped the trend of the corporate sector and fled from the commitment of final salary pension schemes.

Save the Children, Age Concern, Help the Aged and Oxfam all closed their schemes to new recruits, spooked by swelling deficits in the wake of the stock market collapse.

But this year, as the market has recovered, the sector seems to be reappraising its attitude to defined benefit schemes and their role in attracting and retaining staff.

Last week, the RSPCA reaffirmed its commitment to its final salary scheme, as it struck a deal with trade union Amicus to end the long-running dispute over redundancies, which at one stage threatened to flare up into strike action. The animal charity will increase its contribution to the pension scheme by 11.4 per cent, to counteract the decline in investment values.

Barnardo's has also reaffirmed its intention to keep its final salary scheme open to all, although it is in the middle of a pension review that will probably result in staff paying more.

Citizens Advice has launched its own review with the same determination that the final salary scheme will not be ditched. And Christian Aid says its final salary scheme is an integral, permanent part of the package it offers to staff.

Striking a balance

The contrasting approaches to pension settlement go to the heart of the dilemma that all charities face - how to offer the best conditions to staff, avoid the private sector's ruthless fixation with the bottom line, yet spend as much as possible of their donated income on the cause.

Few would question that final salary schemes mean a better deal for workers.

They offer a defined benefit which guarantees them on retirement a proportion of their final salary each year until death. The charity, notwithstanding stock market losses, must make sure it has enough money in the kitty to meet this commitment. Hence the recent contribution hikes from the RSPCA and others.

The main alternative - so-called money purchase schemes - define the contribution the employer makes, leaving the employee a sum at the end of their working life with which to buy their pension or annuity. But the level of that pension is entirely dependent on the state of the market when they retire.

Oxfam, in closing its final salary scheme to new employees last November, was explicit about the choice it was making.

"This is a swing from a scheme where the employer bears most of the risk," says rewards manager Frances Richardson, "to one where the employee does." However, the charity is planning another pension review in an effort to come up with a new scheme, which will more equally balance the risk.

Bearing the burden

But others seem quite prepared to continue to bear the potentially unlimited liability of the final salary scheme. Part of the reason for this is a recognition that charity workers are paid substantially less money - according to some calculations up to 28 per cent lower - than their counterparts in the public and private sectors.

Unless charities are willing to offer other inducements such as improved family-friendly policies or generous pension arrangements, they will not manage to recruit or retain key staff.

In some areas, such as children's services, charities are directly competing with the public sector for staff.

"You have to decide what kind of employer you want to be," says Citizens Advice finance director Stephen Williams, who is also a member of the Charity Finance Directors' Group pensions taskforce. "Charities need to see pensions in a wider sense. People in charities may be happy to work for less pay than market rates, but in return they do want to have more security."

This is echoed by Christian Aid director Daleep Mukarji: "The final salary scheme gives some sense of staying on, and of security. Our staff are not paid that well and this at least gives them the assurance of a reasonable pension," he says.

A question of ethics

But not everyone is entirely comfortable with this risk-benefit analysis.

Lawyer Michael Jacobs, a member of the Acevo Young Committee which produced the Chips are Down report on charity investment strategies last January, says charities face an 'ethical dilemma' if they raise funds from the general public primarily to fill their pension fund black hole.

"If it's a large charity with a relatively small deficit, then it's probably the correct thing to do, but for a little charity with a pension hole that is very substantial, using large amounts of donated income to fill that gap is morally and ethically questionable."

He even suggests that in some circumstances a charity may consider winding itself up, "on the basis that any new money will be going first to fill the pension scheme and only then to fulfil the charitable objective."

Charities Aid Foundation chief executive Stephen Ainger would not go quite that far, although he does argue that the pension crisis exposes the need for charities to be more transparent about the work they do.

"No-one will argue about the pension fund increases you give if you are transparent about the impact you are having," he says.

"If a charity can demonstrate that it is in the top quartile in terms of impact, then in that context how much the charity gives to staff pensions is kind of a detail.

"But if the impact is not so good, people will be asking questions about what the charity does, and any decisions about what the charity puts into its pension fund will be open to even greater scrutiny."

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