The demise of the British Association for Adoption and Fostering (BAAF), has sent shock waves across the charitable sector on both sides of the border.
One of the most significant factors in tipping this respected three decade-old children’s charity into extinction appears to have been its pension liabilities.
Full details have yet to emerge, but we know BAAF’s total liabilities, including pensions, grew from £731,000 in the year to 31 March 2013 to £2.3m by the following year.
The charity is not alone in facing such punishing mathematics. The underfunding of pension schemes has been addressed in the private sector by closing defined benefit schemes to new entrants and requiring employees to pay more into less generous schemes.
Charities have been slower to respond. Perhaps some have been negligent or unwilling to take tough decisions. But a major factor has been that large numbers north and south of the border participate in multi-employer pension schemes, including local government pension funds. Some are effectively trapped in them.
When those running these schemes take action to address underfunding, the contributions a charity must pay increase, a process completely beyond its control. With interest rates so low, the cost of addressing deficits is dramatically higher.
Existing laws trap charities, because exiting a multi-employer scheme currently exposes a charity instantly to so-called Section 75 debt, which can mean incurring a ‘cessation’ cost many times higher than the paper deficit.
This is a real issue for many Scottish charities. I know of one Glasgow charity currently paying around 20% of the salaries of all staff in the Strathclyde Pension Fund. It can’t afford this, but can’t leave the scheme.
Scotland’s Cassandra in all this has been David Davison, director and head of not-for-profit practice at actuaries Spence and Partners, who has been warning of the threat pensions pose to the very existence of some charities for years. He says 20% isn’t unusual and he knows of others paying 30% or higher.
But charities are not businesses, which must turn to their shareholders if hit by unexpected costs. You can’t apply to the Big Lottery Fund for a grant to cover pension liabilities. Most don’t even want to talk openly about it. How would donors and funders react if told their latest contribution would not go towards frontline work with children or animals or the elderly, but to plug a hole in the charity’s pension bill?
The Westminster government is already looking at the problem, having set up a board to look into the underfunding of local government pension schemes, many of which include large numbers of charities as members. A sweeping list of recommendations emerged but it is not yet clear what help the government will offer charities, if any.
Some may argue that charities should not get any help - but Mr Davison points out that due to outsourcing of work by public bodies such as councils, larger charities are often asked to transfer in public sector staff with generous pension terms. In a twist he describes as 'completely ridiculous', said public bodies then also demand the charity cuts its costs.
Scottish ministers, charities, councils and unions are looking at these issues, and the funding of pensions such as local government funds and the Scottish Voluntary Sector Scheme.
This is all taking time, though and the financial demands on charities are pressing. Some smaller charities are succumbing to them already. BAAF is one of the most high profile so far, but it is unlikely to be the last.
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