Pensions: The Problem with Pensions

Against a backdrop of the national pensions crisis, charities are struggling to find the best way to help their employees plan for retirement. Sandra Danby looks at the options.

Pensions are now a national headache, not least for staff and for employers in the commercial and voluntary sectors. Large deficits have accumulated over the past five years and the larger charities are divided over the right course of action.

Save the Children, Age Concern, Help the Aged and Oxfam have closed their final-salary schemes to new employees in the past two years, while the RSPCA, Citizens Advice and Christian Aid remain committed to their final salary pension schemes.

So what is a charity to do? Pensions are a key part of the remuneration packages for attracting new executives from the commercial sector. Charities are also keenly aware of the moral obligation they have to their employees.

But if a pension scheme turns sour, it can have a direct impact on the financial position and standing of a charity. The Charity Commission says the way in which a pension scheme is chosen and run is ultimately down to the charity as employer, the trustees of the scheme and the scheme actuary.

The commission's policy accountant, Ray Jones, says a charity must make its own choice about the type of pension arrangement best suited to its circumstances. "The Charity Commission places no requirement on charities to provide pension arrangements for their staff and recognises that pension provision, particularly final salary schemes, is a complex area which requires careful consideration by the charity trustees," he says.

"The implementation of FRS 17 (the financial reporting standard related to retirement benefits) will highlight to charities when pension deficits arise, and where significant deficits are identified from accounts reviews, the commission will be in a better position to ensure trustees of the charity have given consideration to the issues arising. It is important to realise that a charity does not have to meet such deficits immediately, but rather through agreement with the pension scheme trustees and reviewing the amount of future contributions based on actuarial advice."

Each charity affected must assess how any increased contributions will impact on cash flow and future plans. The Charity Finance Directors' Group (CFDG) and the Charity Commission are currently liaising on how charities should deal with the cash-flow implication when explaining their reserves policies in their annual accounts.

"Some charities may need to designate funds to help them meet increased contributions, while other charities will meet these increases from future resources without the need to use designated funds," says Jones. In its report, The Charity Pensions Maze, the CFDG called on the commission for guidance. It says: "Recent changes in accounting standards have caused new ambiguities about how to value pension schemes. There is the short-term valuation of a pension scheme as represented by the FRS 17 valuation, and the longer-term funding position reflected in the actuarial valuation. That means that more guidance for trustees is needed to help them work out whether their scheme is actually solvent."

Any charity wanting to open a pension scheme must take professional advice.

Mark Cooper, head of employee benefits at PKF Financial Planning, says there is no set answer to how big a company should be before it considers setting up an occupational scheme: "Instead it will depend on budget and how the costs are split between employer and employee."

Ian Luck, director of pensions and financial planning services at Smith & Williamson, agrees. "There is no definitive size for an occupational scheme," he says. "But I would suggest there is little point in setting up a new occupational money purchase plan for less than 100 lives, and a defined benefit plan for less than 500. This will, of course, also be determined by what the charity can afford."

But Matthew Demwell, actuary at Mercer Human Resources Consulting, says charities or businesses with less than 3,000 employees should not consider a defined-benefit scheme.

"The costs are volatile and could be an unacceptable burden. The investment income could possibly be spent on meeting pension costs and not on the charity's real aims."

For smaller charities, Demwell recommends the stakeholder option. "It is third-party administration, so you don't have to run it yourself."

A choice in the matter

George Wilkinson, partner specialising in occupational pension scheme law at Ashfords, says the decision for small charities is straightforward.

The commission defines a charity as 'large' if it has an income of more than £10m for two consecutive financial years, or £100m in assets, while a 'small' charity will have an income of less than £10,000 a year. "The choice for smaller charities is that there is no choice," he adds.

Closing an existing pension scheme is a decision not to be taken lightly or without professional advice, warns Louise Howard, pensions solicitor at Nabarro Nathanson. "Inadvertently putting a scheme into wind-up could result in an obligation to satisfy the whole funding deficit in one go," she says. "The trust deed and rules of a scheme will govern what is and is not permissible and who will need to be involved in the process. There will also be employment law to take into account.

"It is more than likely that there will be many conflicting issues to take into account, even if the practical difficulties can be overcome."

Stephen Nichols, deputy chief executive of the Pensions Trust, is equally adamant that charities must act now: "If a charity has not already done so, it should review its occupational pension arrangements. Employers' balance sheets are no longer immune from having to recognise the funding level of an occupational pension scheme, and this can severely affect the employer's solvency. Closing the scheme is just one course of action and may lead to increased costs in the short term. Care should also be taken not to trigger a wind-up, particularly if the scheme is in deficit."

Before a charity takes its decision, he advises, it must appoint an independent financial adviser.

Outsourcing pension administration may be a useful cost control, and Nichols offers clear guidelines: "If an employer undertakes to administer their scheme in-house, then they will need at least one person whose primary role is to look after the pension scheme, irrespective of the size of the scheme.

"All aspects of scheme management can be outsourced, including trusteeship. This can be achieved through managing a series of contracts with a number of providers or through one of the few organisations that can provide all the services. The cost will depend on your requirements, though typically you get what you pay for."

Financial consultation

There is no requirement on charities to provide pensions advice for its employees but, according to Luck, in the last Budget gave employers the option to offer staff up to £150-worth of financial consultation with an adviser each year, without the cost being a benefit-in-kind charge.

This, Luck says, is "clear endorsement for access to advice. Provided that the charity chooses a respected independent financial adviser who, by definition, is personally responsible for any advice given, there should be no comeback on the charity for anything that goes wrong."

Howard says charities must be wary of giving pension advice to employees.

"Charities tend to maintain a paternal approach towards their employees, and the temptation is to assist employees as far as possible with pension provision.

"While this is admirable, advice should be generic. They must be extremely careful not to stray into what could be considered financial advice as it is very unlikely that a charity would be authorised to do this by the Financial Services Authority, and the penalties can be severe."

Demwell agrees, stressing the differences between a charity giving information to its employees, and giving advice. "The safest thing to do is not to give advice," he advises.

The 'close it or keep it' pensions issue is about "marrying affordability to value", Luck says. "Charities must consider whether what they offer is relevant to their employees. A defined benefit scheme is usually a good one, but unless it is valued by staff, it is wasted money."


Thinking about setting up a pension scheme? These are the essential questions to ask, according to Ian Luck from Smith & Williamson:

- Do you comply with your legal obligations?

- How much can you afford?

- Do you want your employees to contribute?

- How much involvement do you want?

- How will you communicate the scheme to staff?

- Who can help you to set up the arrangements?

Thinking of shutting down an existing pension scheme? Consider these points:

- What are your contractual obligations?

- Why are you closing the scheme and what other options are there?

- What will it cost to wind up?

- What will you offer in its place?

- How will the staff perceive this and is that important to you?

- How can this change be managed effectively?

- Who can help you to wind up the arrangements?


PKF's Mark Cooper explains the terminology ...

Defined Benefit (DB) - also known as final salary. A member is given a benefit promise by his employer based on length of service and final salary. The employer appoints trustees who have responsibility to make sure the scheme is run correctly. The trustees make the investment decision in line with the investment principles set down for the scheme. The employee carries no investment risk, which remains with the employer. The scheme is secure as long as the employer can afford to maintain the required funding levels.

Defined Contribution (DC) - also known as occupational money purchase, CIMP or COMP. The employer agrees to make a set contribution. Most schemes require members to make contributions which, like DB, are limited to 15 per cent of earnings cap salary (£102,000) for all members who joined since 1989. Benefits are based on the size of the investment fund and are restricted, as with Defined Benefit, to a maximum pension of two-thirds of the final remuneration. Trustees have to ensure that the scheme is run within Inland Revenue rules.

Group Personal Pension Plan (GPPP) and Stakeholder. These are not occupational schemes, so there are no trustees. Members own the pension funds and make decisions on investment and contributions. Employers set their contribution rate and this forms part of the overall contribution limit set by the Inland Revenue based on age bands. The final benefits are governed by the size of the investment and the annuity rates at the time of retirement, which must take place between 50 and 75. Stakeholder also enables a contribution of £3,600 per annum to be made, regardless of salary.

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