Charities and NGOs: grasping Pensions

Charities, like all sectors of the UK economy, are now feeling the pinch from the recession.

Having weathered unprecedented high levels of inflation in recent times, their income is also under threat in areas like legacies, corporate giving and investment income – be it dividends or interest.

The press reports that the British Red Cross cancelled its winter ball as it could not find a corporate sponsor for an event that would normally raise around £500,000; Shelter lost £400,000 in the autumn when corporate sponsors cancelled donations; NSPCC has reduced its activity; and a number of charities have reduced staffing levels. Clearly as the recession deepens, and consumer confidence falls further as unemployment continues to rise, this situation will only get worse.

Unfortunately, in times of recession it is the poorest people that are impacted most, and the levels of poverty in the world rise. So, while costs have gone up and income is falling charities, unlike organisations operating in other sectors, will experience increased demand for their services.

Statutory income (central and local government contracts and grants) is becoming the largest form of sector income; among charities with income between £100,000 and £1m, over 50% receive more than 50% of their income from this source. Members of the Charity Finance Directors' Group (CFDG) report numerous problems with these contracts, not least the inability to secure reasonable annual cost increases and cover all of their costs.

Charities' funds are being stretched to the limit. And of course those that suffer most are the beneficiaries of these charities, who at this time need the world's support more than ever.

During these difficult times charities also have to cope with increased risks in relation to their pension schemes. Indeed, such increased demands could adversely affect the health and viability of a significant number of charities.

In order to do their work many charities are competing with statutory authorities to hire a workforce. Historically they have therefore had to provide pension schemes for their employees that can match the gold-plated schemes offered within the public sector.

Similarly, if charities have taken over work from the public sector then under legislation they have either to provide similar pension schemes or take admitted body status in the employees' existing schemes. While charities may choose the admitted body status route, as they do not want to incur the costs and risks of setting up their own defined benefit schemes, they still find themselves open to the risks of the existing schemes.

Over recent years we have seen increasing costs and liabilities relating to defined benefit schemes, e.g. longevity, reduced investment returns and increased regulation.

The large falls in the investment market over the last six months will have an adverse effect on the equity part of schemes' assets. Scheme valuations from September 2008 can be expected to fall, and scheme trustees and employers will be having some interesting conversations about scheme funding and recovery positions. It will be interesting to see the stance that the pension regulator takes in this climate as it starts to review recovery plans around September valuations in the summer.

In October 2008 the pensions regulator issued a statement to trustees about current financial pressures, in which it said: 'We have reviewed our approach to the implementation of scheme-specific funding in the light of the current economic conditions, and believe it remains fit for purpose.' However, it went on to say 'we are in unprecedented times and our approach will be kept under review', and further, that, 'Our operational processes will continue to reflect the conditions in which recovery plans were produced'.

It is really important for all sectors, not just the charity sector, that the pensions regulator takes a flexible approach; it would be very sad if organisations that are essential to the poorest in the world, and which might otherwise survive, were to fail due to a regulatory system that puts too much emphasis on short-term fluctuations around a long-term product. Very few charities are able to pledge assets or cash to match these short-term fluctuations.

The whole area of mergers and corporate reorganisations is also a minefield for charities. Both the government and the Charity Commission have made positive statements about charity mergers in recent years. Indeed the Charities Act 2006 includes a number of areas which will facilitate charity mergers. It clearly has to be expected that merger activity will increase in the sector as the recession deepens.

Also in the Charity Act are the initial steps towards the formation of Charity Incorporated Organisations (CIOs), and many unincorporated and incorporated charities may choose to become CIOs. Secondary legislation is still required before the CIO structure will be available to charities.

The CIO is a new legal form of incorporation designed specifically for charities; it offers the advantages of a corporate structure, such as reduced risk of personal liability, without the burden of dual registration with the Charity Commission and the Register of Companies at Companies House. This is a corporate reorganisation and like a merger is expected to require clearance under the Pensions Act 2004.

While it may often be the case that the pensions regulator may not want to issue a Contribution Notice or a Financial Support Notice following its review of the planned corporate activity, the costs and timescales involved can make such activity prohibitive to the sector and hence stop many trustees considering what might otherwise be attractive options at this time.

Many of the risks that charities with defined benefit pension schemes are facing are similar to those faced by all other sectors of the economy, and like other sectors of the economy they are not immune to the effects of the recession.

In these difficult times it is really important that pension regulation reflects the current economic climate and doesn't add to the despair. For otherwise healthy organisations to fail – and be unable to assist those who need help most during the current economic climate – is of no benefit to anyone, least of all the employees that the regulation is there to protect.

Keith Hickey is chief executive of the Charity Finance Directors' Group