Military charity SSAFA has reported a pension deficit of more than £40m - an increase of £11m on the last year, equivalent to eight months' income.
The figure is revealed in annual accounts published last week. However the charity says in the accounts that its financial position remains healthy, and that it has free reserves of £19m.
It says it believes the pension debt "does not consitute a diminution of reserves" because ultimate liability rests with the Ministry of Defence.
It says an agreement dating back to 1977 puts pension liability in the hands of the MoD.
The charity has 221 active members in a multi-employer pension scheme run by the London Pension Fund Authorty and pays 25 per cent of their salary into the scheme each year. Last year it closed the scheme to new members.
The charity’s pension deficit has grown steadily over the past five years, to roughly two-thirds of its £59.7m total annual income for the year ending 31 December 2014.
SSAFA said the recent growth in the deficit was down to changes in interest rates, rather than anything under the control of trustees.
SSAFA's annual review reveals the charity held discussions with the Ministry of Defence last year about whose liability the deficit was, stating that SSAFA was waiting for the MoD to agree a “progressive deficit reductions plan”.
“Trustees consider that the MoD has an obligation to underwrite the liability in respect of staff who transferred to SSAFA a number of years ago,” the review said.
Last year the charity's total funds fell from £17.2m to £6.3m, with much of the reduction owed to the increasing pension deficit.
SSAFA has said it is in talks with the MoD and expects resolution by early 2016.
A spokesman for the Ministry of Defence told Civil Society News it was involved with "ongoing discussions" about SSAFA's pension liabilities following a historical agreement dating back to the 1970s which reflects our particular relationship with the charity".
"It is a complex issue which needs thorough consideration," the spokesman said.
The charity currently employs 760 staff and works with 7,055 volunteers. Some £24.5m was spent on staff wages and salaries with the highest earner taking home a wage of between £120,000 and £130,000. This individual is a medical professional employed as part of SSAFA's contracts with the MoD and NHS.
The review puts the charity’s unrestricted reserves at £19m at 31st December 2014, amounting to 1.14 years of running costs. But its accounts reveal group unrestricted funds were at £1.2m by the end of the year – just one week’s worth of operating costs.
SSAFA says this discrepancy is because the pensions debt is a responsibility of the MoD, and is therefore not recognised as a liability in the reserves.
