Charities participating in multi-employer defined benefit pension plans will have to include figures for liabilities in their annual accounts, according to new guidance from the regulators.
The new approach is explained in Information Sheet Four, which was recently published by the charity regulators behind the Statement Of Recommended Practice (SORP).
The guidance takes effect for accounting periods beginning on or after 1 January 2020 and applies in the UK and Republic of Ireland to charities preparing accounts in accordance with the Financial Reporting Standard.
Don Bawtree, partner at accountancy firm BDO, told Civil Society News the total liabilities owed by charities within these pension schemes are huge numbers, which “distort the accounts”.
He said they can go up and down vastly depending on the stock market.
Actuaries’ improved capabilities behind the change
The change in requirements has come about because actuaries managing the multi-employer defined benefit pension schemes are now better able to calculate the totals owed, said Bawtree.
The joint SORP-making body decided not to formally include the amendment in the charities accounting rules, the SORP (FRS 102), made in May to the Financial Reporting Standard 102.
However, it decided additional guidance via the information sheet would be useful where a charity participates in a multi-employer defined benefit pension scheme and where sufficient information from the actuary is available.
Bawtree said the youth charity YCMA, with its various branches, was an example of a charity using a multi-employer defined benefit scheme, where different employers pooled funds owed under their own defined benefit pension schemes.
The defined benefit scheme is a pension arrangement where employers pay a certain, defined amount to retired employees. This can be around two-thirds of an employee’s salary, which is paid each year until their death.
Bawtree said total liabilities to charities from these schemes are often very large amounts, and current interest rates mean charities are expected to have “huge amounts of money saved up” to pay them.
Charities are already expected to report liabilities from defined contribution schemes, which have started to replace defined benefit plans.
The defined contribution scheme takes a percentage of an employee’s salary each month and a certain, defined contributive percentage from the employer.
No new SORP until 2022/23
Minutes from the July meeting of the SORP Committee have revealed there will be no new SORP until 2022/23.
An updated version of the current SORP was published earlier this month and summarises the accounting and reporting rules for charities.