h1_bkg

Pensions: the dormant volcano?

George Osborne indicated during the comprehensive spending review that he expects to take up most of the recommendations in Lord Hutton’s interim report on pensions, published earlier this month.

Hutton’s review, commissioned by Osborne earlier this year, admitted in effect that the government could not afford its pension debts, and recommended steps to reduce costs. This affects many charities that joined local government pension schemes several years ago, and are now finding out that, without knowing it, they bought land on an economic fault line – a dormant financial volcano.

At the time it seemed like a good idea for most, but that’s changed now: the volcano has woken up and is spouting ash. Most charities in these schemes have found they have large liabilities over which they have little control, which can grow wildly in size with little notice; they will never really know the risk they’re running till the debt comes due.

It’s also difficult now to get out. Any charity that wants to get out needs to settle its whole deficit once and for all, which often costs more than all the contributions made up till now.

Even so, it may be worth confronting the problem now, because Osborne also made it clear it will soon be compulsory to enrol all your employees in a scheme – something many organisations cannot afford.

Also, all charities will have to deal with it, sooner or later. Eventually, the last employee they have in the scheme will retire, and their debts will all come due.

Worryingly, some have little idea of the trouble they are in – to the extent that the Pensions Trust, a charitable provider of multi-employer schemes, has started holding awareness-raising sessions to make sure enrolled charities realise the issues they may face.

If you’re a trustee of one of the many unincorporated organisations in this scheme, you’re at particular risk. Trustees may have personal liability for debts which can run into hundreds of thousands of pounds; many may be blithely unaware that they are living in their own personal Pompeii.

One trustee has already been sued personally for the debts of his charity’s pension scheme. The charity has been bailed out, and he will not have to pay, but several others currently have the threat hanging over their heads.

It is only a matter of time before a charity trustee is forced to pay off his charity’s pension liabilities personally, potentially to his or her personal ruin. Only then, most probably, will many others realise the danger they are in.