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

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

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

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

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