Posts Tagged: charity pensions

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.

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Small charities and staff pension schemes do not mix

Small charities and staff pension schemes do not seem to go well together. Too often, when combined, they lead to disaster, particularly for the trustees.

A good example of this is Hirwaun YMCA, a small charity which, many years ago, hired two people without realising it was opening itself up to a large future pensions deficit. When the last member of staff left, the charity’s liability crystallised and it was required to pay off its debt immediately.

Hirwaun said it couldn’t afford to pay, and as a result the chair of the trustees has been sued personally for the money.

Hirwaun is by no means the only unincorporated charity to face closure because of a large and unexpected pensions bill for which the trustees are personally liable. And it is not the only charity where the pension plan trustee is considering suing trustees to get its money back.

In a way, the chair of Hirwaun is lucky. He can sell his charity’s building, close the YMCA down, and pay the debts. Others may not have the luxury of valuable fixed assets to help them out.

The problem is potentially widespread. Small charities up and down the land have signed up to unsuitable pension plans which they will find difficult to get out of, and will leave them with enormous bills when the last employee leaves. Incredibly, small charities are still signing up today to highly risky defined benefit pension plans, while at the same time large corporations are desperately shutting theirs down.

Why do trustees get themselves in these situations? Often because they don’t know what they are signing up for. It takes a lot of work and plenty of technical knowledge to find out your potential worst-case pensions liability, and anyone without a background in finance stands little chance.

Volunteers should not have to take on such risks. But they do, often without realising. And there is little by way of a safety net to help them.

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Many charities don’t realise how bad their pension problems really are

A few recent stories highlight the impact of the wider pensions crisis on the charity sector.

The combined pensions deficit of the 20 largest charities is around £720m, according to a study by Alexander Forbes.

And
last week, two pensions specialists who advised charities in the
Scottish Voluntary Sector Pensions Scheme – a multi-employer scheme for
small charities – came out and said they believe the scheme presents a danger to many of the charities involved.

A
year ago, an expert predicted to me that at least one major charity
would go under because of its pensions deficit – and it’s certainly
true that there are some out there with major deficits to worry about.

But
in truth, it’s likely to be the smaller organisations, such as those in
the Pensions Trust scheme, that really suffer. They can’t access good
professional advice, they can’t use their reserves to ride out
financial volatility and they haven’t got the in-house expertise to
know if they’ve made the right decisions. Many have signed up for
schemes on the advice of partner or parent organisations that will
prove wholly unsuitable.

The key question is how many other
charities up and down the country are enrolled in local authority and
other multi-employer schemes that are totally unsuitable for them, and
as a result have deep problems that they are totally unaware of.
Probably a lot.

Many of the charities in the Scottish scheme were not aware of the pensions problem they had on their doorstep, according to this blog by David Davison, a pensions consultants who has advised several of them, and this seems to be a common problem.

Many
small charities discover too late – often when merging or shutting down
– that a six or seven-figure debt, larger than their annual income, is
to fall due any moment.

It’s a particularly serious problem for
the trustees of unincorporated charities. They are personally liable
for the debts of their charity.

And, like this trustee, they can find themselves owing an awful lot of cash.

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