Charities ought to treat their pension deficit like “Japanese knotweed” and try to “bury it out of existence”, delegates at yesterday’s Charity Finance Summit were told.

David Locke, director of finance and support services at the Baptist Union of Great Britain, presented a session on dealing with deficits on defined benefit pension schemes, drawing on his experience of tackling a £27m deficit at BMS World Mission, where he was previously finance director.

Working closely with professional advisers, BMS under Locke’s leadership developed and implemented a trigger-based de-risking strategy which involved locking in 2 per cent improvements in the pension scheme’s funding by switching increases to less risky assets within a 24-hour timeframe.

After three years, funding of the scheme had increased from 79 per cent to 96 per cent and it is on track to be fully funded within the next three years.

Locke told the audience that their charities must not postpone dealing with their deficits.

“Your pension debt is an integrated part of your charity’s balance sheet, you have to own it and you have to de-risk your balance sheet,” he said.  “You need to treat it like a credit card debt, and get a plan in place to get rid of it, otherwise you’re in danger of living in never-never land.”

Locke advised delegates to try to pay off their pension debts within 15 years, and suggested four tactics to help reduce it on top of the asset-switching strategy he favours.

The first is to use any proceeds from unbudgeted property sales to fund the scheme.  

Second is to budget for an operating surplus and allocate that to the deficit.

Third is to put any legacies that come in that are over and above your budget, toward the debt.

And fourth, any savings that your charity makes during the year should be used to fund the deficit too.

Locke also said that he had agreed with the pension scheme trustees that instead of making payments to the scheme each year, he would make a block payment every three years.  This helped to reduce stress on the organisation by enabling it to get ahead of its annual targets.

However, he warned that tackling a large deficit required full cooperation between the charity’s trustees and the pension scheme trustees, and also the advice of external professionals.  “Sometimes your trustees will need to hear the plan from someone else too,” he said.

• David Locke wrote an article for Charity Finance earlier this year outlining his strategy for tackling his charity’s pension deficit.  Subscribers to civilsociety.co.uk can read the article here.