Caron Bradshaw comments on the Charity Commission's Pension Deficit Report

9th May 2014

Caron Bradshaw, Chief Executive of the Charity Finance Group, comments on the Charity Commission’s Pension Deficit Report:

“For some time CFG has been hearing from our members that they are concerned with challenges arising from pension scheme deficits. The findings revealed by the Charity Commission yesterday underscore the tensions in this area and the struggle charities face in responding to the serious risks posed. We have been straight with the sector about the need to tackle what we’ve previously described as a potential 'time bomb'.

CFG is grateful for the in-depth analysis of charities accounts to highlight key risk areas. It’s important however, that abstract numbers without context don’t send disproportionate warning signals to the public that the sector is not managing their risks appropriately. On the contrary, in the case of pension deficits, the sector is taking a strong stance on leading the resolution of the hostile legislative and economic environment which is causing the difficulties.

It is important to understand some context behind these figures. For pensions, charities operate under a legislative environment modelled on the corporate sector. This presents a number of difficulties, such as ensuring covenant levels reflect a non-dividend paying entity.  The structure of multi-employer schemes has also trapped charities in schemes remaining open to future accrual, compounding their risk.  For many exiting a scheme and triggering an exit (‘Section 75’) debt is simply not an option. Instead they have to try and balance the risks and structure repayment and recovery obligations for the charity.

CFG has been working closely with the DWP to consider how challenges posed by the Section 75 debt in multi-employer schemes can be changed for the long term security of both charity and pension scheme."
John Tranter, Chair of CFG’s Pension Maze project says:

“There are a variety of mechanisms that can be put in place to manage down deficits including applying enhanced transfers, using reserves strategically and matching liabilities with contingent assets. However, the reality of the situation is that charities need support in making careful decisions around these options.  Some charities, despite engaging with these options early on, are simply unable to tackle escalating risk as a result of legislative restrictions.

Initial results from our DB pension survey highlight the difficulties that charities face in managing their pension risks. It reveals that approximately 75% of our membership participating in multi-employer pension schemes would consider or would definitely close their scheme if they could do so without crystallising the Section 75 debt.

The Charity Commission’s report gives an interesting snapshot of the extent of the impact of pension scheme deficits in larger charities. It is important, however, that policy makers understand the impacts for smaller charities too. For example, members are also alerting us to their concerns over exposure to Local Government Schemes through contracting arrangements. Smaller charities may have fewer resources to fully understand the risk they are taking on when they enter into these arrangements. We will work hard to inform charities about these risks, but Government must also improve the transparency in contracting arrangements.

CFG will continue to encourage our members to drive up standards regarding all relevant disclosures, of which pensions deficits are just one part, through their annual reports. We agree with the Commission that it is important charities address the risks posed by pension liabilities; internally, by engaging with the issue as a strategic risk, and externally, explaining how they are managing this."

CFG will be launching the third edition of its ‘Pension Maze’ in the summer. The Charity Pension Maze publication aims to explain the array of complex pension issues and risks that charities face. It also serves to highlight those critical risk issues which are of concern to the sector and have wider policy implications. This publication will be the 'go-to' guide for finance and human resource directors, chief executives and charity trustees to get their charity on track to best manage their pensions. 

ENDS

Notes for editor:

1. Charity Finance Group’s vision is to inspire the development of a charity sector that is  financially confident, dynamic and trustworthy. CFG works with finance managers to enable them to give the essential leadership on finance strategy and management that their charities need; promoting best practice in charity finance, driving up standards, campaigning for a better operating environment and ensuring every pound given to charity works harder. CFG has more than 2,200 members, and collectively our members are responsible for the management of over £19bn in charitable funds. 

2. CFG launched an auto-enrolment guide for charities in November 2013, 'Auto-enrolment for charities'.  The key findings from the CFG survey on auto-enrolment and DC are published in that report.

3. CFG raised concerns about the challenges that charities in multi-employer defined benefit pension schemes have faced with Government, and are currently working with the DWP to consider solutions. CFG has also flagged concerns with the Pensions Regulator about implementing its new objective and the impact that will have on the assessment of defined benefit funding positions.

4. For more information, please contact sarah.woodfield@cfg.org.uk

5. John Tranter, is an associate CFG member, Director of Numon Consulting, former Finance Director at Mencap and works on a number of charity pension issues.

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