The UK’s largest charities have a combined pension deficit of around £5bn, so large that collectively they could not afford to pay off their debts, according to figures from financial services firm BDO.
BDO’s analysis was carried out in conjunction with Charity Finance magazine and looked at the pension liabilities of the largest 50 charities, taken from the latest accounts filed with the Charity Commission.
It found that 40 of those charities have combined unrestricted funds of £3.29bn, but that if those 40 were to pass on their liabilities to an insurance company, they would have to pay £4.98bn.
Those 40 charities have a collective annual income of £5.97bn.
Of the remainder, nine charities did not have a defined benefit pension scheme, while the Wellcome Trust has a large deficit but faces no solvency problems because of its £13bn investment portfolio.
Donations going to pay off pensions debts
Richard Farr, head of the pensions advisory team at BDO, said it “would not be uncommon” for more than 10p in every £1 donated to a charity was going to support their pension scheme.
“If the public realised that their donations are going to fund charity pension debts I wonder what will happen,” he said.
He said the situation was considerably worse than it appeared because while BDO’s assessment looked at charities’ income and reserves, it did not take into account how much of that money was spent on raising funds, was committed to other debts, or was needed for future expenditure.
“This isn’t a problem which is likely to go away,” he said. “These charities have debts falling due over 20 or 30 years. They need to build up capital to meet these debts but they’re spending everything they earn. That means they’re at the mercy of the markets.
“These are organisations that should never have had defined benefit pension schemes. It’s a complete mismatch.”
A defined benefit pension scheme is one where the employer agrees to pay a fixed amount to scheme members when they retire. Most defined benefit pension schemes are in deficit due to increasing life expectancy and worse-than-predicted investment performance.
Those deficits can be calculated in a number of ways; the BDO figures look at what the charity would likely have to pay in order to have an insurance company take over their debt, which is a much larger figure than the ongoing deficit included in a charity’s accounts, which the BDO figure showed to be just over £800m.
The largest buyout deficits, according to BDO figures, were Barnardo’s, estimated at £578m, the National Trust, estimated at £560m, and Action for Children, estimated at £427m.
The full research is available here to Charity Finance subscribers.
