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When Not-For-Profit Meets Not Fit For Purpose

When Not-For-Profit Meets Not Fit For Purpose

We all know the script up to this point: since the early 90s successive governments have tried to increase the protection to DB pension schemes against underfunding and abandonment by their sponsoring employers.   Changes introduced aim to encourage companies to be more accountable for the promises they make, and work to secure the benefits that employees expect to receive in retirement. 

Whilst ensuring future sustainability for their business and the pension scheme, encouraging investment and job creation is something all employers with DB liabilities are struggling with.  However, it is widely recognised and acknowledged that pensions legislation impacts charities and not-for-profit employers disproportionately and inequitably and is not fit for purpose.
Charities and not-for-profit entities have been described as the unintended victims of legislation and pension scheme structures which were designed and aimed at corporate and public sector entities.  
DB pension schemes demand large cash injections to fund ongoing contributions, deficits and costs. Whilst there are a number of options available to commercial employers to reduce their risk and their financial exposure, and to manage their exit debts from these schemes, the legislative framework is a lot less flexible when applied to the type of scheme structure that typically charities and other not-for-profit organisations use. 
Why are charities / not-for-profit employers different?
It’s because of the type of DB schemes that they commonly participate in.   These are schemes for large numbers of employers who are completely separate entities.  The only thing that they usually have in common is that they are part of the same industry or sector (“industry-wide schemes”). 
Large numbers of non-associated employers participate in one legal trust governing the whole scheme, with one trustee board which is commonly completely independent of the employers and their members.  The trust usually gives the trustee board very wide decision making powers over almost all aspects of the pension scheme.  Often the employer may feel (and may actually be) very remote from that decision making process with no real power to influence it. 
A significant number of charities/ not for profit organisations participate in these industry-wide schemes. Many employers joined decades ago under a completely different regulatory regime, with the aim of providing their employees with good defined benefit pensions and (rightfully at that time) to take advantage of the financial benefit in sharing risk, administration and other costs. 
Now, because of changing legislation, they find themselves trapped in industry-wide schemes that often they cannot afford to stay in, but cannot afford to get out of either because of the level of the exit liabilities they would face.   Compounding this is the fact that when employers fail in these types of schemes their financial obligations fall on the remaining employers, increasing the financial burden on those remaining employers still further.  
It is about to become a more pressing issue
The issue of industry-wide schemes will become even more pertinent next year when new accounting rules will require charities to record pension liabilities in a different way on their balance sheet.
The current accounting standard only requires charities and other not-for-profit organisations to disclose their ongoing contributions (as opposed to their liabilities, which is potentially a much larger number) on their balance sheet if they are unable to identify their share of assets and liabilities in a multi-employer scheme on a consistent and reasonable basis. Many employers in these types of industry-wide scheme fall into this category. For organisations not already disclosing their liabilities, the proposed change could be significant.  It will make pension liabilities much more transparent and may impact on how funders and donors regard their financial prudence and future commitment to fund the DB pension scheme. 
It’s not about special treatment; it’s about fair treatment
No charity or not-for-profit organisation would argue that the protection of members’ benefits should be diluted purely because they are a charitable or not-for-profit organisation.   The issue is that current legislation just does not work as well for these employers in industry-wide schemes. It seems clear that flexibilities must be introduced to allow such employers to manage their liabilities and ensure their future viability.  
The Regulator has recently consulted on its revised DB funding and regulatory guidance.  The documents recognise the Regulator’s new statutory objective to ensure the sustainable growth of the employer.  But what is sustainable growth for a charity? Charity and not-for-profit entities’ goals are less frequently expressed in terms of “growth” compared to commercial organisations.  The structure, role and funding of charities differs fundamentally from their corporate counterparts. The Regulator will need to understand their unique characteristics to establish what “sustainable growth” looks like for such employers.   
It’s also imperative for trustees and employers involved in charity and not-for-profit pension schemes to understand how the Regulator will assess the sponsoring employer’s covenant ( the financial strength of the employer responsible for meeting pension scheme liabilities) -  described by the Regulator as “the cornerstone” of trustees’ approach to funding. The methodology for determining a commercial employer’s covenant does not necessarily accurately reflect the strength or otherwise of a charity or not-for-profit organisation to support its pension obligations. They are simply not the same things. 
Will the Government do the right thing? 
Presently the Government and the charities and not-for-profit sector are locked in a dialogue in an attempt to address these issues.  As our charitable and not-for-profit sector takes an increasing role in alleviating the financial burden on the State to provide those in most need with valuable services, if we truly value that contribution and want to ensure its continued viability, the Government must start implementing policy which recognises and reflects its needs and unique pressures.  And its worth.  

Whilst ensuring future sustainability for their business and the pension scheme, encouraging investment and job creation is something all employers with DB liabilities are struggling with.  However, it is widely recognised and acknowledged that pensions legislation impacts charities and not-for-profit employers disproportionately and inequitably and is not fit for purpose.

Charities and not-for-profit entities have been described as the unintended victims of legislation and pension scheme structures which were designed and aimed at corporate and public sector entities.  

DB pension schemes demand large cash injections to fund ongoing contributions, deficits and costs. Whilst there are a number of options available to commercial employers to reduce their risk and their financial exposure, and to manage their exit debts from these schemes, the legislative framework is a lot less flexible when applied to the type of scheme structure that typically charities and other not-for-profit organisations use. 

Why are charities / not-for-profit employers different?

It’s because of the type of DB schemes that they commonly participate in.   These are schemes for large numbers of employers who are completely separate entities.  The only thing that they usually have in common is that they are part of the same industry or sector (“industry-wide schemes”). 

Large numbers of non-associated employers participate in one legal trust governing the whole scheme, with one trustee board which is commonly completely independent of the employers and their members.  The trust usually gives the trustee board very wide decision making powers over almost all aspects of the pension scheme.  Often the employer may feel (and may actually be) very remote from that decision making process with no real power to influence it. 

A significant number of charities / not-for-profit organisations participate in these industry-wide schemes. Many employers joined decades ago under a completely different regulatory regime, with the aim of providing their employees with good defined benefit pensions and (rightfully at that time) to take advantage of the financial benefit in sharing risk, administration and other costs. 

Now, because of changing legislation, they find themselves trapped in industry-wide schemes that often they cannot afford to stay in, but cannot afford to get out of either because of the level of the exit liabilities they would face.   Compounding this is the fact that when employers fail in these types of schemes their financial obligations fall on the remaining employers, increasing the financial burden on those remaining employers still further.  

It is about to become a more pressing issue

The issue of industry-wide schemes will become even more pertinent next year when new accounting rules will require charities to record pension liabilities in a different way on their balance sheet.

The current accounting standard only requires charities and other not-for-profit organisations to disclose their ongoing contributions (as opposed to their liabilities, which is potentially a much larger number) on their balance sheet if they are unable to identify their share of assets and liabilities in a multi-employer scheme on a consistent and reasonable basis. Many employers in these types of industry-wide scheme fall into this category. For organisations not already disclosing their liabilities, the proposed change could be significant.  It will make pension liabilities much more transparent and may impact on how funders and donors regard their financial prudence and future commitment to fund the DB pension scheme. 

It’s not about special treatment; it’s about fair treatment

No charity or not-for-profit organisation would argue that the protection of members’ benefits should be diluted purely because they are a charitable or not-for-profit organisation.   The issue is that current legislation just does not work as well for these employers in industry-wide schemes. It seems clear that flexibilities must be introduced to allow such employers to manage their liabilities and ensure their future viability.  

The Regulator has recently consulted on its revised DB funding and regulatory guidance.  The documents recognise the Regulator’s new statutory objective to ensure the sustainable growth of the employer.  But what is sustainable growth for a charity? Charity and not-for-profit entities’ goals are less frequently expressed in terms of “growth” compared to commercial organisations.  The structure, role and funding of charities differs fundamentally from their corporate counterparts. The Regulator will need to understand their unique characteristics to establish what “sustainable growth” looks like for such employers.   

It’s also imperative for trustees and employers involved in charity and not-for-profit pension schemes to understand how the Regulator will assess the sponsoring employer’s covenant (the financial strength of the employer responsible for meeting pension scheme liabilities) -  described by the Regulator as “the cornerstone” of trustees’ approach to funding. The methodology for determining a commercial employer’s covenant does not necessarily accurately reflect the strength or otherwise of a charity or not-for-profit organisation to support its pension obligations. They are simply not the same things. 

Will the Government do the right thing? 

Presently the Government and the charities and not-for-profit sector are locked in a dialogue in an attempt to address these issues.  As our charitable and not-for-profit sector takes an increasing role in alleviating the financial burden on the State to provide those in most need with valuable services, if we truly value that contribution and want to ensure its continued viability, the Government must start implementing policy which recognises and reflects its needs and unique pressures.  And its worth.  

Deborah Adam
Director

Mark Lindsay
Director

Burness admin