After the release of the Charity Commission’s Pension Deficit Report, Caron Bradshaw, chief Executive of the Charity Finance Group, gave the CFG view on the situation.

Bradshaw said: “For some time CFG has been hearing from our members that they are concerned with challenges arising from pension scheme deficits.

"The findings revealed by the Charity Commission yesterday underscore the tensions in this area and the struggle charities face in responding to the serious risks posed.

"We have been straight with the sector about the need to tackle what we’ve previously described as a potential 'time bomb'.

"CFG is grateful for the in-depth analysis of charities accounts to highlight key risk areas. It’s important however, that abstract numbers without context don’t send disproportionate warning signals to the public that the sector is not managing their risks appropriately.

"On the contrary, in the case of pension deficits, the sector is taking a strong stance on leading the resolution of the hostile legislative and economic environment which is causing the difficulties."

Bradshaw added that it is important to understand some context behind these figures: as for pensions, charities operate under a legislative environment modelled on the corporate sector.

"This presents a number of difficulties, such as ensuring covenant levels reflect a non-dividend paying entity.

"The structure of multi-employer schemes has also trapped charities in schemes remaining open to future accrual, compounding their risk.

"For many exiting a scheme and triggering an exit (‘Section 75’) debt is simply not an option. Instead they have to try and balance the risks and structure repayment and recovery obligations for the charity."

She added that CFG has been working closely with the DWP to consider how challenges posed by the Section 75 debt in multi-employer schemes can be changed for the long term security of both charity and pension scheme."

John Tranter, chair of CFG’s Pension Maze project, added: “There are a variety of mechanisms that can be put in place to manage down deficits including applying enhanced transfers, using reserves strategically and matching liabilities with contingent assets.

"However, the reality of the situation is that charities need support in making careful decisions around these options. Some charities, despite engaging with these options early on, are simply unable to tackle escalating risk as a result of legislative restrictions.

"Initial results from our DB pension survey highlight the difficulties that charities face in managing their pension risks. It reveals that approximately 75% of our membership participating in multi-employer pension schemes would consider or would definitely close their scheme if they could do so without crystallising the Section 75 debt.

"The Charity Commission’s report gives an interesting snapshot of the extent of the impact of pension scheme deficits in larger charities. It is important, however, that policy makers understand the impacts for smaller charities too.

"For example, members are also alerting us to their concerns over exposure to Local Government Schemes through contracting arrangements. Smaller charities may have fewer resources to fully understand the risk they are taking on when they enter into these arrangements.

"We will work hard to inform charities about these risks, but Government must also improve the transparency in contracting arrangements."

He noted that CFG will continue to encourage our members to drive up standards regarding all relevant disclosures, of which pensions deficits are just one part, through their annual reports.

"We agree with the Commission that it is important charities address the risks posed by pension liabilities; internally, by engaging with the issue as a strategic risk, and externally, explaining how they are managing this."

CFG will be launching the third edition of its ‘Pension Maze’ in the summer.

The Charity Pension Maze publication aims to explain the array of complex pension issues and risks that charities face.

It also serves to highlight those critical risk issues which are of concern to the sector and have wider policy implications.

This publication will be the 'go-to' guide for finance and human resource directors, chief executives and charity trustees to get their charity on track to best manage their pensions.

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