Posted by:
Jane Tully
Article read time:
3 minutes
People and culture
7 March 2013, 18:16
A pensions palaver
Charity pensions have made headlines in numerous guises of late. Before Christmas we had the story of People Can, a charity that went insolvent under the weight of its pensions ...
Charity pensions have made headlines in numerous guises of late. Before Christmas we had the story of People Can, a charity that went insolvent under the weight of its pensions deficits. In the new year, Barnardos announced plans to consult on its future pension plans and just this week we had the collapse of the NAVCA and Community Matters merger talks. The common thread here relates to the long-term affordability of defined benefit pension schemes.
Charities are facing a situation common to all employers with pension obligations. Poor market returns, low gilt yields, creeping regulation and lengthening life expectancy have coalesced to result in growing deficits. This, an additional and sometimes unpredictable outlay for employers at a time when finances are already tight, is one cost that organisations could do without.
Fortunately, it seems that Government are finally waking up this, recognising that employers’ sustainability is also a vital cog in the machine of protecting individuals' future pensions. In his autumn statement the Chancellor said that the Government is
’determined to ensure that defined benefit pensions regulation does not act as a brake on investment and growth’. A surprise and welcome statement!
The Confederation for British Industry (CBI), National Association of Pension Funds (NAPF)and others have been crying out for some time about how pension deficits are prohibiting companies from inward investment and delaying decision making - the bottom line in their argument to Government being that it impacts on growth and the economic recovery. For charities, the reality is no different. As employers, they are holding off from developing or extending their services due to the volatility of schemes. With contribution levels growing, they have no option but to commit donated resources to meeting obligations at a time when this is needed to meet increasing demand for services. This scenario has the potential to put at risk the public trust and support which is so vital to the sector’s sustainability.
We raised these concerns
in response to the Government’s consultation on Pensions and Growth last week and also sought to explain the unique challenges charities, as pension contributors, face. Lack of loans and contingent assets, and restricted funds mean that charities have a narrower range of flexible funding tools than private sector organisations. Lack of certainty about future funding can also make repayment plans difficult to negotiate.
One particular issue we raised, which is of pressing urgency, relates to multi-employer defined benefit schemes. While organisations signed up to these schemes with the best of intentions, times have changed. Regulations that did not affect them in the past are now catching them out. These schemes are ill-suited to charities, although that may not have been so obvious when they were first designed. The initial appeal was that organisations can share the costs and risks, however we now know the reality is that could increase costs and risks.
Charities in these schemes are in a double bind. If they stay in the schemes they face rising contributions and increasing orphan debt, but if they leave, as they will ‘crystallise’ what are often enormous buy-out debts. What makes matters worse is that if one charity goes insolvent, its debts are then divided between the remaining chariites in the scheme. This can lead to the uncomfortable situation of a charity raising funds to pay off liabilities that resulted from a completely unrelated charity’s collapse. I’m not sure how one would explain this to donors.
In our submission we asked Government to review the legislation for charities in these schemes to permit them to cease accruing benefits without automatically triggering a cessation liability – the additional money they’d have to pay to unlock them from the scheme. We also suggested exploring options for 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 finally we sought greater flexibility around the Pension Protection Fund, so that pension funds can operate in a more flexible way that is more responsive to an employer’s financial situation.
This time last year when we raised these concerns, we were politely told it wasn’t an issue on DWP’s priority list. This year, with a few unfortunate charity pension shock stories under our belt and the increasing awareness that more are likely to come, that response has changed. The signs are there that Government is finally sitting up and realising that the current situation is unsustainable, and that action needs to be taken now.
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