The Pensions Regulator has for the first time produced specialist guidance on how to assess charities and not-for-profit organisations, saying that pension funds should treat charities’ donation income differently.
Many charities are members of pension schemes run by other organisations, particularly schemes for public sector workers in health, education and local government. Often when the contributions of charities to these schemes are assessed, charities are asked to contribute more money because their covenant – their ability to guarantee payment in the future – is considered to be weak.
Charities are often assessed by standard models used to measure the strength of public or private sector bodies. However the Pensions Regulator guidance suggests key differences in the model of not-for-profit organisations (NFPs) means they should be treated differently.
“Where NFPs have material elements of both commercial income and donations, these should be analysed as distinct operations,” the guidance says. “The overall assessment of covenant should be based on an appropriate combination of the covenant provided by commercial and non-commercial activities.”
It also says that pension scheme trustees must think about payments may affect a charity’s ability to attract more funding.
“Given the NFP’s reliance on discretionary donation income for sustainability, trustees should be cognisant of the impact that the level of the scheme contributions as a proportion of donation income can have on donor perceptions and therefore their donor’s willingness to support the NFP, and possibly also on the income from its commercial operations.”
It also says that when assessing a charity’s income and expenditure, pension fund trustees should remember that much of a charity’s expenditure may also be discretionary.
The guidance, published yesterday, was welcomed as a positive step by the Charity Finance Group, which has campaigned for recognition that charities look different from public and private sector organisations.
It was also welcomed by the National Association of Pension Funds.
Sarah Woodfield, a policy adviser at the NAPF, said: “The Pension Regulator’s new guidance on covenant assessment indicates a real gear change. We welcome the pragmatic nature of the document and the thoughtful and extensive approach TPR has taken to engage with the charity sector and relevant regulatory departments, such as the Charity Commission.
“The new guidance is intended to help build a robust and collaborative approach to covenant assessment between schemes trustees and sponsoring charitable employers, by encouraging them to look more closely at financial factors unique to the sector, such as the reputational risk that pension liabilities pose, in particular to donor support.”
