Pension liabilities are causing "devastating" problems for charities, charities have told Steve Webb, the pensions minister.
A joint letter, sent to Webb at the Department for Work and Pensions yesterday by the National Council for Voluntary Organisations, the Charity Finance Group and the local infrastructure body Navca, says that many charities spend so much money on pension debts that they "find themselves unable to invest in services, to merge or restructure".
"Front-line services are already suffering, and for some closure is the only option," the letter says.
It says many charities are forced to spend donated money on meeting pension debts rather than increased demand for services.
The letter says many charities sponsor employees in 'defined-benefit' pension schemes – a type of scheme in which the employer guarantees a certain level of payment to retiring employees.
Most of these schemes are in deficit because contributions were too low in preceding years. This has happened because actuarial assumptions have grown stricter, markets have underperformed expectations and retired people are living longer than before.
The letter says that between 4,000 and 5,000 charities face particular problems because they have employees in 'multi-employer schemes – often because, as part of a contract with local government, they have taken on employees who were already members of such schemes.
If a charity wants to withdraw from a scheme, it normally acquires a ‘cessation liability’, which requires it to pay off its whole deficit at once. This is usually unaffordable, so a charity cannot close the scheme and stop accumulating more debt.
However, the cost of remaining within the scheme is also often unsustainable, and charities usually have little control over how much they are required to pay.
"Many charities originally entered these schemes in good faith, but are ultimately the unintended victims of schemes designed for corporate entities which are wholly unsuitable for charities," the letter says. "We urge the government to act with urgency to address this perilous situation that many of the small organisations at the heart of their communities find themselves in."
The letter asks for the government to review the legislation for charities in these schemes to allow them to stop building up debts without immediately triggering cessation liabilities.
It also asks the government to look into developing a support fund "to allow charities to borrow money to pay off their pension deficits and then pay the borrowed money back over an agreed period of time".
And it asks the government to change the rules concerning the Pension Protection Fund, a fund that compensates members of a scheme if their employer goes bust, and to which all employers contribute, so that pension funds can operate in a more flexible way.