Top charities' pension deficits rise by a third to over £1.2bn

31 May 2016 News

The UK’s 50 largest charities have seen the combined deficit on their pension schemes rise by a third over the past two years, according to research by Charity Finance magazine and the accountancy firm BDO.

Every two years Charity Finance publishes a report on charities’ defined benefit pension scheme liabilities, with data analysis conducted by BDO.

A defined benefit scheme is one where the charity agrees to pay a fixed amount at retirement - usually a portion of an employee's final salary. These schemes are mostly in deficit because historically employers underestimated life expectancy and were too optimistic about stock markets.

Most charities have now closed these schemes, but despite that fact, the research found that the top 50 charities spend more than £200m a year - around one pound in every forty they receive - on meeting obligations and making up deficits.

Most charities will also have to make substantial contributions to "defined contribution" pension schemes, which offer a pension but do not guarantee the final value of the pension pot.

This year’s research finds that, when calculated on the “FRS 17” basis laid out by the Financial Reporting Council, these leading charities’ combined deficit stood at £1.2bn, up from £901m in 2014.

The two figures are not strictly comparable as two charities included in the list in 2014 are no longer among the top 50 ranked by income in Charity Finance’s Charity 100 Index.

However, the 39 charities which have defined benefit pension schemes and which appeared in both years’ analyses have seen their deficit rise by a similar amount, up 25 per cent from £902m to £1.13m.

Charities respond to deficit leaps

The largest increase reported by an individual charity is at the Wellcome Trust, with its deficit nearly doubling to £218m.

Speaking to Charity Finance, its chief financial officer Tim Livett emphasised that the deficit can change year on year as asset valuations and actuarial assumptions shift, but said the charity is nevertheless making lump sum payments each year to fund the deficit.

The trust is also fortunate in that it has £16.9bn of unrestricted funds sitting on its balance sheet should they be needed.

Elsewhere, the National Trust’s deficit was up £39.0m to £154.0m, Barnardo’s saw its deficit up £21.2m to £109.0m, and RSPB’s deficit was up £18.7m to £86.5m. All have deficit recovery plans in place.

Charities which have seen their deficits reduce include Cancer Research UK, the British Red Cross and RNIB.

A problem across sectors

Speaking about the findings, Anjelica Finnegan, senior policy and public affairs officer at the Charity Finance Group, said organisations in all sectors are facing seemingly large deficits as a result of these historical commitments.

“Like all other parts of the economy, charities are faced with falls in equities and bond yields and rising life expectancy. The trend in the charity sector has been to close final-salary, defined benefit schemes.

However, she added that charities are facing some unique challenges. “Those that have limited access to unrestricted funds, such as those delivering public service contracts, will struggle to find income which they can use to pay down deficits.”

Subscribers to Charity Finance and CivilScoiety.co.uk can read the full report here, and BDO's analysis here.

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