A charity set up to promote peace and reconciliation in Northern Ireland has wound up because its pension liabilities have become unmanageable. Last month, the Trustees of the long standing Spirit of Enniskillen Trust made the decision to wind up the charity because of a deficit in the organisation's defined benefit pension scheme.
The situation highlights the deepening crisis faced by charitable organisations who have been hit by a decline in funding as result of the economic downturn. To compound matters, the failure of one charity in this way could make it more likely that others go bust because of the unusual way many charities combine their pension funds.
Last man standing
Charitable organisations, especially smaller ones quite often participate in "multi-employer" defined benefit pension schemes established by and run by a central administrative body. Such schemes often operate on a "last man standing" basis, which means that, when one employer fails, its obligations are taken on by the remaining employers. As many charities struggle in the current climate, a failure at one level can put added pressure on the other employers thus increasing the risk of further failures by triggering a "domino effect".
The upshot is that:
- More charities could face the prospect of folding;
- Members could face a significant reduction in benefits if a scheme ends up in the PPF;
- Thousands of third sector jobs could be lost; and
- Millions of vulnerable people could be denied access to vital services on which they rely.
Lack of funding
In recent years, charitable organisations have witnessed a decline in funding. Government grants have been cut and donations have fallen. The latter source of funds being even more difficult to attract if donors believe their money is being used to plug a pensions' shortfall rather than being used to further the charitable objectives for which the organisation was established in the first place.
Pension deficits of this nature are nothing new, the 'profit driven' private sector continues to do battle with defined benefit deficits. However, the fundamental difference for the charitable sector is that there are no profits or shareholders to call upon for extra funds. Charities therefore struggle to maintain their current defined benefit pension obligations and face the very real risk of going out of business altogether.
Many small charities (like small commercial organisations) established defined benefit pension schemes when they really shouldn't have because of their size or resource. That said, when times were good it was difficult to envisage the combined effect of falling interest rates, lengthening longevity and lower than expected investment performance. It is fair to say that little or no thought would have been given to the likelihood of funding significant deficits, say twenty years ago.
Industry concern
In February of this year, umbrella groups representing the UK voluntary and community sector wrote a joint letter to Steve Webb, the Minister of State for Pensions. The letter, written by the Charity Finance Group, National Council for Voluntary Organisations and the National Association for Voluntary and Community Action expressed concern for up to 5,000 UK charities in "multi-employer defined benefit schemes".
They said that the situation was "unsustainable" and that many organisations are facing a "no win" situation – spiralling debt if they remain in the scheme or having to meet "enormous buy-out debts" in order to withdraw from it.
These issues remain on the Government's agenda and a recent extract from Hansard has Mr Webb stating that he is "aware of concerns about the impact of pension liabilities on the charitable sector. DWP and Cabinet Office officials are looking at the issues in discussion with sector representatives".
Whilst we await the outcome of these discussions the charitable and voluntary sector hope for strong leadership to curb this ever growing crisis which could have a catastrophic impact on the charitable sector. A bold and imaginative solution is needed.
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