Hindsight is always a valuable analytical tool. As a tool, it is uniquely available to all, but,unfortunately, it is limited in its practical application to working out what went wrong once it has already gone wrong. Its therefore relatively easy to find an adviser in almost any field of endeavour who can confidently point out where you went wrong.

There is little awareness currently among charitable and not-for-profit organisations of the significant and potentially catastrophic risks posed to their organisations by their final salary pension scheme. Many small charities and not-for-profit organisations have been encouraged to participate in local authority or multi-employer final salary schemes. As with many things, this probably seemed like a good idea at the time, however hindsight, and successive changes to pensions legislation would suggest that it was totally inappropriate for them to do so.

We already seen one charity, Family Service Units, fail as a result of it’s pensions liabilities and it’s difficult to imagine that there won’t be more. Under current legislation it’s also surprisingly easy to accidentally trigger a pension scheme deficiency which could be very material, and possibly catastrophic, to the organisation concerned.

There has been an increased understanding in the corporate world of the risks posed by final salary pension liabilities as a result of the requirement to disclose them in corporate accounts under FRS17. The risks for charities are identical, but as they are generally less apparent they are less well understood by the sector.

This is because a charity will typically have a series of disclosure options open to it depending upon the structure of the pension arrangement being provided. If it has its own scheme then, in all likelihood, it will be required to make the appropriate disclosures because it can clearly identify the scheme assets and liabilities. However, where the charity is part of a local authority scheme, or similar multi-employer arrangement, then the identification of its particular share of the assets and liabilities can be more difficult.

Consequently there is a significant lack of consistency in this area which causes a great deal of confusion. Some local authority schemes have now set up mechanisms for participants to access FRS17 numbers on a consistent basis at a reasonable cost however, this is not universally the case.

Also, one prominent multi-employer scheme will readily admit that it has no ability to identify individual member movements or individually account for payments from the employers who participate in their scheme which must make the provision of accurate FRS17 numbers either very expensive, if not pretty much impossible.

This places the scheme sponsor and indeed the company auditor in a very difficult position as they need to know if they are in a position to disclose appropriate information. It could be argued that failure to disclose misrepresents the financial position of a charity placing them in a very difficult position and where they are unable to get accurate figures to allow them to disclose they need to both be aware of the extent of any material liability existing. The message is therefore that even if disclosure is not possible awareness is essential.

Unfortunately for many organisations the extent of the problem only really becomes visible when a business related activity occurs such as the merger of organisations or the incorporation of a business. In the not-for-profit sector these type of revisions are often pursued with very little awareness of the potential pension implications. Both of these events however would be classified as a withdrawal under the current multi-employer withdrawal arrangements and the debt involved is likely to be considerably higher than even the FRS17 measure. It’s important to note that even where there is no intention to change the pension scheme provision as part of the change certain decisions can trigger this debt payment as a matter of course. As with many similar circumstances it is then much more difficult to go back and try to negotiate something commercial than it would have been had the debt not been triggered in the first place.

The current withdrawal process is unnecessarily cumbersome and not really suitable in these circumstances and there are indeed already proposals under consultation to revise the regulations however it’s what we’re working with at the moment. The current process requires regulatory approval and not surprisingly a significant amount of paper coloured in. Even the current process is relatively new and there is little experience dealing with it so timescales can be slow and processes cumbersome.

Those responsible for the financial management of these charities will need to have a much stronger handle on the issues to understand how they are affected. They need firstly to have clearly identified the pension schemes financial position and any options available to them. They will also need to identify the potential staffing impact of any changes which they might decide to make. The Charity need to be clear about the contractual arrangements under which they provide services and how these impact on the responsibility for pension scheme funding and they need to consider how the pension funding position should be accurately and realistically presented in the charities accounts, especially where a previous disclosure has been made.

The appropriate funding and disclosure of pension scheme liabilities has the potential to impact significantly on all aspects of the charities work, not just in the limited sphere of the pension fund itself. It is an area where it may well be in the best interests of the charity board to seek independent advice, rather than to rely entirely on advice provided to the pension scheme trustees. By its very nature advice to the trustees will, quite rightly, be approached from the perspective of the scheme rather than the employer. In the current UK economic climate it is often the case that the schemes needs and that of the employer are no longer directly aligned.

This is no longer an area which can be ignored in the hope that “it’ll be alright on the night.” All these areas need to be thoroughly examined, the risk areas identified and action taken.

ENDS

Posted in: Blog
Tags: Charities, Not For Profit, Pensions, Public Sector