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Why should charities be concerned about public sector pensions reform?

Finance | David Davison | 21 Jul 2011

Charities cannot afford to take their eye off the ball as the debate over pensions evolves, warns David Davison.

Short of a prolonged trip to a remote island you could not have escaped all the debate about reform of public sector pensions. For many charities this may appear to have only a peripheral relevance to them but for others the impacts could be very significant.

Many civil society employers participate in public service schemes. These organisations cannot have failed to notice how costs to provide defined benefit pensions for staff in these schemes has continued to rise. Some schemes have witnessed a 100 per cent+ increase in employer contributions over the last 10-12 years. Whilst for the larger participants in schemes this is a debate to be carried out with the government on behalf of the tax payer this is not the position for smaller participating organisations who have no "daddy with deep pockets" to seek out to meet any increase. These increases instead have a very direct impact on the organisations finances and how they meet their charitable objectives.

There is also a developing trend within these schemes to begin to segregate employers in to groups and base their contributions more specifically on their circumstances and the default risk they pose to the scheme rather than using assumptions averaged across all participants. It seems inevitable as this continues that smaller participants will witness proportionately higher contribution increases. 

It is not only the cost implications which weigh heavily on trustees minds but also increasing liabilities and therefore risk. As liabilities increase so volatility becomes much more of an issue and will have a direct and material impact on potential future contributions. The retention of the existing scheme framework means that cost and risk volatility remain high.

The knock-on effect is also that where organisations are competing with the public sector for staff the benchmark is set higher, as are the costs for providing out-sourced public services. Undoubtedly many civil society bodies who would be ideally equipped to provide these services are discouraged from doing so because of the high and ultimately unknown cost of providing defined benefit pension schemes.

There is momentum for change to public sector pensions and some re-adjustment to more affordable levels could be beneficial for civil society organisations. Any change however needs to also be co-ordinated with other potential developments around reviewing non pubic services bodies participation in public sector schemes, changes to 'fair deal', and a fundamental review of the exit options available to multi-employer participants.

It's well worth watching this space...

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Who's Who: David Davison