Blogs

Mind the chandelier!

Finance | David Davison | 14 Feb 2011

With a raft of issues to keep on top of during the coalition's Big Society shake-up, David Davison warns not to overlook pensions in your budgets. 

Any fan of the TV show Only Fools & Horses will remember with some fondness the episode where the Trotters take on the task of removing a chandelier in a stately home. The comedy punchline was, of course, that despite what seemed to be careful planning, they were waiting below the wrong chandelier and watched in horror as one behind them crashed to the ground.    

As civil society organisations go through the difficult process of making their budgets add up in the face of widespread cuts in their income, they will be focusing carefully on effectively managing their income and expenditure. As part of this process they really need to consider their pension scheme to make sure it’s not the equivalent of an unwatched chandelier.

There are a whole raft of issues organisations will need to get to grips with over the coming months including flexible retirement options, the introduction of NEST and the findings of the Hutton Report.

In addition, many organisations which participate in local government pension schemes and other multi-employer pension arrangements will be bracing themselves for the production of actuarial valuation reports which few expect to bring good news. A toxic cocktail of historic deficits, poor investment returns, continuing longevity improvements and rising inflation are likely to result in higher contribution rates.

(At least the likely move from RPI to CPI for some schemes will bring some funding benefit as will any reduction in scheme accrual for the future as a result of Hutton’s findings, although this may be longer off and not provide any respite from shorter-term valuations.)

Organisations need to closely consider the likely impact and if they can afford to continue as they currently do, and if not what options are open to them. Some areas worthy of consideration are:

Scheme affordability today and in the future

Do you have options open to you which may limit the build up of further liabilities or indeed remove them altogether? Local authorities are showing a great deal more flexibility in allowing organisations ill-equipped to build up further liabilities to extricate themselves from a scheme over time bringing the option more within reach for many.

Pension accounting under FRS17

The assumptions used are the responsibility of the charity trustees, not the pension scheme and you need to be sure that you are using assumptions that reflect your organisations specific circumstances. So don’t just automatically accept what is provided but question it and take your own advice where necessary.  

Beware inadvertently triggering a substantial cessation debt

...for example as a result of incorporation, restructure or just not having any active members in the scheme.

Such an event could be catastrophic for the organisation.

Providing out-sourced services to local and central government

There are increasing opportunities for third sector organisations providing out-sourced services to local and central government. However, great care needs to be exercised over the pension provisions required. Meeting the fair deal test or providing for the enhanced level of early retirement terms available is very onerous and organisations shouldn’t commit without understanding all the implications.

Beware that chandelier – it may be right in front of you!

David Davison is a director of Spence & Partners Actuaries and Dalriada Trustees

Tweet

Who's Who: David Davison