Charity Finance Group estimates that up to 5,000 charities are financially damaged by restrictive rules around multi-employer pension schemes.

It has called on the government to open a consultation on the matter.

CFG says that multi-employer pension schemes, originally designed to bring benefits from collectively owning the pension liability, and which can work effectively for businesses, are not suited to unconnected organisations such as charities; a point recently acknowledged by the government.

A spokesman said: “Having entered these schemes in good faith, charities are now finding themselves trapped, unable to afford to stay or leave. Looking to the future, the liabilities these charities face are growing rapidly, with no realistic exit routes and for many, insolvency will be the only option.”

Caron Bradshaw, CEO of CFG said: “We are gravely concerned about this – the situation is utterly devastating for many of the charities stuck in these schemes. Moreover, because of their liabilities they are unable to merge or restructure and are losing out on public sector and grant funding. And worryingly, vital resources - both financial and time - that should be directed towards delivering key services, are having to be redirected to address these liabilities.

"We recognise that this is an extremely difficult area for the government, and the importance of ensuring that members' benefits are protected, but standing still is just not an option. We believe that collective engagement is the only way to find solutions that work for everyone and give charities a level playing field.”

David Davison, director at Spence and Partners and author of the paper for CFG, added: “I’ve unfortunately witnessed first-hand just how significant, and potentially damaging, defined benefit pensions are for charities.

"The legislative environment which organisations face is completely unsuitable and in need of review. It is simply not in anyone’s interests, neither members, employers, schemes or the tax payer, for these charities to continue to build liabilities which they cannot afford. CFG is right to raise the profile of this issue, encourage debate and to actively pursue change.”

The paper comes just days after the Cabinet Office and DWP launched a ‘Red Tape Challenge’ on pensions.  This initiative seeks information on overcomplicated regulations which strangle organisations and contribute to poor outcomes for members and will explore whether they can be reformed or abolished. CFG will be raising the impact of the regulations relating to multi-employer pension schemes in response to the challenge.

• The May edition of Charity Finance, out tomorrow, explores in detail the pensions positions of the UK's largest charities.  Subscribers to civilsociety.co.uk can access the survey and articles here from today.