A government with its head in the sand

EARLIER THIS YEAR, CFG, adopted a new name and strapline, ‘Inspiring financial leadership’. For me this means creative, innovative, confident and strong financial management. Easy to aspire to; more difficult to deliver in the absence of the right operating environment for charities. The truth is, many aspects of the regulatory environment need to change, and for this the government needs to take real action on some complex and technical areas.

It’s not just the current news headlines of tax and philanthropy, where frustrations are being felt by those of us in the charity sector. Some of the less sexy but equally significant questions also need some serious attention – such as pensions.

‘Pensions’ are often the elephant in the room, we all know they’re there, but digging under the surface and working out the detail can be terrifying. The problem is that the issues are far more complex and go deeper than you would at first think. Our concerns are not limited to ridding ourselves of pension deficits (although that is one aspect of it). Legislation and regulation in many ways is not fit for purpose if we genuinely want to develop civil society and our public service delivery markets. It is time that the government stopped shying away from tackling some of the glaring inequalities and expressed a commitment to review the difficult issues.

CFG has recently shed light on some of the significant problems for charities part of multi-employer defined benefit pension schemes. Concerns with DB schemes are well known; with an ageing population and rising inflation, the benefits are not keeping in pace with the liabilities – giving rise to massive pension deficits. A major problem, but at least for bigger organisations with their own schemes, one they can manage themselves out of by closing the scheme to new entrants and gradually reducing the deficit.

However, the situation in multi-employer schemes is somewhat different. In an insolvency situation, organisations’ liabilities stay on in an ‘orphan pot’, which gets distributed amongst everyone else – until there is a ‘last man standing’. Unsurprisingly charities will want to avoid holding the parcel when the music stops, or for any other reason, may want to stop building up benefits in the scheme and cease to have active members. However, that will automatically trigger what is known as Section 75 debt. This is essentially the cessation amount, or the amount to buy-out of the scheme, and is likely to be more than your current liabilities. For many, such a payment would itself lead to insolvency. So charities are faced with no option but to stay in the scheme and continue contributing. Damned if they do and damned if they don’t.

The recent high profile Wedgewood Museum case has brought to light what can happen when the ‘last man standing’ ends up with a whole heap of pension liability. Having to sell the proverbial family silver (or in this case pottery) to settle the debt.

While the schemes were designed to bring benefits from joint ownership of pension liability this just doesn’t work for charities, a point recently acknowledged by the government. And often charities are being put at risk because of shared liabilities with organisations they have no connection with.

Over the years many charities have become part of a number of multi-employer schemes, such as Local Government Pension Schemes (LGPS). It may have made sense or seemed like a good idea at the time. However, as time has moved on the problems have grown in significance and the liabilities ballooned.

A briefing paper prepared for CFG by David Davidson from Spence and Partners highlighted that up to 5,000 charities could be financially hurt by being part of these schemes.

On top of this we have TUPE and Fair Deal legislation – regulations that offer important employee protection. Perhaps justifiable on a philosophical level but when services are contracted to new providers such as charities that are unable to afford the costs problems arise. Charities may end up taking on staff with unaffordable pension contributions where the previous liability transfers with them, or are excluded from tendering for such contracts altogether. Consequently we end up with a market dominated by a number of private sector giants and a few not-for-profits taking on disproportionate risk, which does not deliver the open and varied public service provision the governments’ reforms intended. This blocks innovative thinking and creates little in the way of new opportunities.

This is a complex issue that requires a well-considered consultation. The government has no plans to do this in the near future. Nor will they entertain an exemption for charities on grounds they fear changes would put member benefits at risk more widely. We’re not advocating an exemption as a solution to the problem. Neither are we asking for a favour because we’re charities. Society needs a root and branches review to make the legislation work better overall.

If government don’t stop burying their head in the sand, hoping the problem will go away, and look at this issue with a fresh view, it will put thousands of organisations at risk, stifle development of public service markets and eliminate many possible mergers and collaborations. When it comes to LGPS and some other multi-employer pension schemes, the tax-payer bears the ultimate risk of doing nothing. We’re ready to work collaboratively with government on this as we know the problem isn’t just going to disappear – now we just have to wait to see if they want to work with us.

Caron Bradshaw is chief executive of the Charity Finance Group