London-based charity Community Service Volunteers has reported using the sale of property assets to reduce the risk posed by its pension deficit, as defined benefit schemes reach their lowest aggregate funding level in 18 months.
Many charities have become "trapped" in DB schemes, due to exit penalties and declining funding levels, according to consultants.
Data from the Pension Protection Fund's monthly index show an aggregate deficit of £221.1bn for PPF-eligible schemes, which include charities – the highest since April 2013.
Volunteering charity CSV announced in its 2014 annual report, published late last year, that it had made contributions totalling £2.9m to reduce its deficit within the London Borough of Islington Pension Fund and was seeking a longer-term plan to reduce this risk.
The £2.9m includes a £0.7m contribution from Springboard Sunderland Trust, which was spun off from the charity during the year. CSV made a £5.6m net gain on the sale of its headquarters in Kings Cross, London, and a property in Bristol during 2013/14. This was used to pay off overdrafts and mortgages as well as the pension contribution.
Sir Jon Shortridge, chair of the board of trustees for CSV, said in the charity's annual report: “The cash generated from these sales mean we have been able to repay all of our bank debt and, in addition, make a significant contribution… towards our deficit in the London Borough of Islington Government Pension Scheme."
He added: “There is more work to be done to reduce our pension deficit and we are actively working with the LBI to plan our longer-term strategy in relation to the scheme.”
The charity’s scheme has assets worth £35.7m as part of the Islington fund’s around £971m. However, the present value of the scheme’s obligation is £42.4m, according to the most recent annual report.
CSV said it is undergoing a consultation over future contributions to the scheme, but declined to comment further.
Locked in
Charities involved in DB multi-employer schemes may be unable to leave without triggering a costly section 75 debt.
The s75 debt rules do not apply to local authority funds, but many schemes impose exit penalties that may be equally expensive.
Patrick Bloomfield, partner at consultancy Hymans Robertson, said: "Employers participating in the LGPS are not exposed to the risk of 'orphan' liabilities from other employers failing. But there can be significant risks for a one-off payment at the end of a contract to make good any pension underfunding."
David Davison, director at consultancy Spence & Partners, said: “I think LGPS has been sleeping on the job with this a bit. There are a lot of charities that are in a perilous state because of their involvement with the LGPS.
“The vast majority of charities who have participated in these schemes can’t afford to leave. The charities got trapped in the scheme, they can’t afford to get out.”
Davison added charities faced potential issues around the sale of assets, as property or other assets gifted may qualify as charitable assets. This means the pension scheme may face restrictions on how it can access the asset.
Ruth Bamforth, barrister at law firm Gordons, said: “They’re really quite a big problem, partly because of the nature of what a charity is. DB schemes are really set up for more commercial employers. Charities got involved in them for paternalistic reasons.”
Last year, sector body Charity Finance Group released a report entitled 'Negotiating the charity pensions maze', in which it highlighted the risks for charities when contracting with local authorities.
Tupe regulations on contracted workers – which commonly apply to charity workers carrying out council contracts – have minimum requirements on the pension provision workers are entitled to. However, there is no set rule on who should cover the cost of LGPS workers.
The report stated: “The scope for negotiation on obligations not determined by Tupe will depend on the contracting authority’s own policies. As these are not statutory standards, there may be some room for negotiation. In practice, this is rare and difficult to achieve since the contracting authority is generally following government policy."
The charities need a "good understanding of the relevant regulatory frameworks" such as the fair deal rules, it added.
