Pensions - a growing headache for charities

Just as many charities are concentrating their efforts on cutting costs against a backdrop of reducing income and donations, pension costs are still moving in the wrong direction, and it could be about to get a lot worse! Many charities participate in the Local Government Pension Scheme (LGPS), which is currently facing some real challenges.

Firstly there have been escalating contributions. The latest valuation of the LGPS was, at 31 March 2013, in economic conditions that substantially increased scheme deficits.  As a result, we have seen requests for contribution increase by two or three times (and sometimes more), payable as recently as April 2014. As charities don’t generally aim to generate substantial surplus funds, this sort of payment shock can place a considerable strain on finances.

A second issue is the high cost of exit. Whilst most private sector defined benefit schemes are closed or are closing, this isn’t so easy for employers in the LGPS. Leaving the scheme would crystallise a cessation debt, usually measured on a very prudent “least risk” basis, with the result that it is unaffordable for most charities – especially as the norm is for this debt to be paid in a one off payment on exit.

Another challenge is affordability. All employers, including LGPS, should take into account the affordability of their employers – how much they can afford to pay in contributions, given all the other pressing demands on cash. It is clearly in no-one’s interest to (perhaps inadvertently) cause a charity to fail.  In times of declining income levels, affordability becomes stretched. Also, if too much income is directed towards pension obligations, donations may fall further.

There are therefore significant challenges for charities in the LGPS to overcome. This is the bad news. The good news is that there are ways of managing some of these issues – although it’s a complex area and some solutions can be difficult to implement. Options might include:

1. Cease participation, but over time

Where there is a sensible business case and the risks involved are right for all parties, it may be possible to leave the scheme in a more controlled manner. However, such an arrangement is not always easy to put in place, and policy varies from scheme to scheme.

2. Pledge assets as security

Some LGPS schemes allow an employer to charge certain assets to the scheme (e.g. where the charity owns property). This improves the security of the scheme and should help to reduce its deficit and contribution payments and may allow a longer recovery plan.

3. Take account of the charity’s affordability

In cases where the requested contributions can’t be afforded and would put the charity at risk, many schemes will take this into account in agreeing an employer specific recovery plan. Presenting this in the right way can be a difficult balance, but it is a critical factor in many cases.

Unfortunately, the pension issue isn’t going away yet, and all this is before thinking about how charities manage pension liability in their stand-alone or “industry-wide” scheme. The good news is that there are ways for charities to manage this, just don’t expect it to be easy.

Ian Oakley-Smith and Mark Jennings are Directors in our Pensions Tax team. You can contact Ian on +44 (0) 207 212 6023 or by email at [email protected]. Alternatelvely you can reach Mark on +44 (0) 113 289 4336 or by email at mark.a.jennings@uk.pwc.com