Charities should professionalise their pension fund trustee boards says Bikram Dhesi.

Charities are not immune from the chill wind blowing through the UK’s pension industry. Many household-name charities offer – or offered – their staff ‘defined benefit’ pensions linked to the value of their salaries. They are now finding it difficult to keep their ‘pension promise’ with a number of schemes facing deficits allegedly running into millions of pounds.

The problem is particularly difficult for charities. For many, donations from the public are an important source of income. It’s not easy to tell donors that their generosity is being spent propping up employees’ pensions.

Neither is the solution straightforward. Charities are obliged by legislation to properly fund their schemes, yet for many the debts are increasing more quickly than they can afford. In some cases the situation is so severe that it is not inconceivable that a charity will have to close down simply because it cannot afford its pension debt.

While all charities will appoint external actuaries to meet their reporting obligations and some larger ones can also afford to appoint investment consultants, it’s remarkable how few have professionally qualified pension experts on their pension trustee boards.

While not true across the board, the majority of charities have appointed boards of lay trustees, with no real pension experience. Often this is the finance director, perhaps a number of employees or external donors and the chief executive. This trustee board is then responsible, and personally liable, for the management of pension assets running potentially into millions.

This arrangement can also present trustees with real conflicts of interest. On the one hand, the charity finance director or chief executive will have responsibilities to donors and the Charity Commission to meet the objectives of the charity and put money to the use for which it was intended. On the other hand, as members of the trustee board, they will also have fiduciary obligations to the members of the pension scheme – which may mean that a greater proportion of charitable donations have to be diverted to fund the scheme.

This trustee board also has to meet onerous obligations to invest and manage the scheme’s assets. This involves dealing with actuaries and appointing and managing external fund managers, custodians and scheme administrators as well as arranging triennial valuations. There are even regulatory obligations for trustees to meet high standards of trustee knowledge. They are also expected to know how to address the problems of deficits and interpret the plethora of solutions offered by external advisers.

Against this background, there are a number of options which can increase the professional expertise available to the trustee board. One is to use external pension and investment consultants to a greater degree, a second is to increase the training available to lay trustees to equip them with a greater degree of professional knowledge and a third is to appoint a professionally qualified independent trustee onto the board.

While increasing the professional guidance available to a trustee board won’t solve the deficit problems overnight, it will increase the options available to trustees to manage, control and reduce their long term defined benefit pension liabilities. It can also bring valuable experience of how to more effectively manage the commissioning of advisers. It is worth noting that a professional trustee can also be appointed as a sole trustee to a scheme, which introduces a different dynamic of managing the relationship between the officers of the charity, its staff and stakeholders.

The options available to charities to manage their pension liabilities are wide. These may include closing the pension scheme to new members or to new accrual by existing members. Alternatively the scheme could adopt a long-term policy to manage down its liabilities by using modern liability matching techniques.

Whatever their approach, it is never too soon for trustees to act, both to protect the pensions of their charity workers and to ensure that money intended for charitable purposes is not swallowed by ever-increasing pension deficits. Too many charities rely on lay pension trustees, with limited experience of the complexities of pension management. As charity fundraising has become successfully professionalised, is it now not time for charities to professionalise the management of their pension liabilities as well? 

Bikram Dhesi is lead trustee at Alexander Forbes Trustee Services