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Pensions may be harmful to the future health of your organisation

Finance | David Davison | 14 Sep 2010

Focus on pension shortfalls is growing, with the BBC's £2bn pension deficit hitting the news this week - our regular charity pension blogger David Davison looks at the dangers of out-sourcing pensions.

I read this really interesting article on a dispute between a district council and a housing association but it is a case which highlights some wider issues for employers in the third sector in relation to their pension provision and issues which will become more prevalent as ever increasing amounts of public services are out-sourced to the not-for-profit sector.

There needs to be complete transparency and clarity around pension provision as part of any out-sourcing arrangement and the contractual terms need to link up with any arrangements made with the pension scheme as in all likelihood these will be totally separate parties. This is a very complex area and suitable professional support, both legal and actuarial, is required to make sure all the issues are covered off. This could add some additional cost but it is likely to be a fraction of the likely cost which would be incurred if the agreement signed up to turns out to be wrong.

Organisations need to be totally clear about what liabilities they’re taking on and who is liable for additional costs should things change in the future. Many contracts require the new organisation to assume responsibility for pensions built up well before the organisation came in to existence and frequently of a value many times the size of the organisation.  In one recent example I’ve seen the charity have over 80% of its pension liabilities related to staff service prior to their formation, with a value in excess of 10 times that of the charities assets. There was also no agreement in place which compensated the charity should the cost of these liabilities turn out to be more than expected leaving the charity with a huge potential additional cost from existing revenue. A neat three card trick from the local council!!

Once the agreements are signed it is very difficult to go back to re-negotiate or to pursue additional support so this needs to be right first time. Even if operating to a tight timescale make sure this area gets the attention it deserves and nothing is signed until there is clarity. You definitely don’t want to get this wrong as it may well be the single area which exposes the organisation to the greatest risk of catastrophic failure.

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