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Let’s be clearer about the risk of a pension scheme deficit

Posted by: , Posted on: - Categories: Finance, Guidance

Part of the Commission’s job is to help make charity more resilient, to ensure that it can thrive and inspire trust in tough times as well as good. In this spirit, when we saw an increase in the number of charities reporting a pensions deficit (from 740 in 2012 to 1,219 in 2018) we wanted to understand this better.

We know from the collapse of some substantial businesses that failure to manage a pension deficit can pose a serious threat to an organisation’s future, so we carried out some research into charities with pension scheme deficits.

We began this work by reviewing the financial accounts of 89 randomly selected charities and 11 charities identified through proactive work, each of which reported a pensions deficit. The charities identified had a combined pensions deficit of £557.4m.

Then we carried out a more detailed review of 40 of these charities, asking them about their defined benefit pension scheme deficit. We looked at whether trustees were carrying out actions including:

  • obtaining actuarial valuations as they become available
  • considering the implications to the charity’s finances from the latest available actuarial valuations
  • reviewing the charity’s ability to continue to deliver its charitable objects
  • seeking suitable specialist/professional advice
  • ensuring that a clear explanation about the position is provided within the charity’s accounts to provide transparency. This is especially important if the pension liability is a material (significant) amount
  • ensuring that for larger charities the Trustees Annual Report details any risks or uncertainties relating to the pension scheme and the trustees’ plans to manage those risks

The good news is that most were found to be handling this risk appropriately. The bad news is that, even where the risk was being well managed, we found most charities did not report the matter in enough detail in their annual accounts and trustees’ annual report, as required or recommended by the Charities’ Statement of Recommended Practice (SORP).

For example, 58% of charities from a random sample did not explain, in the trustees’ annual report, the impact of the pension deficit on their financial position. Only 26% of charities included the pension deficit as a risk in the report and only 28% clearly explained, in our view, how they were handling their pension deficit.

For the 40 charities that we looked at in more detail, we provided regulatory advice on the accounting issues they needed to address, and 9 of these charities are now subject to follow-up monitoring.

We will be contacting other charities covered in the review to remind their trustees of the steps they should be taking to manage and report on their pensions deficits and, through their professional bodies, remind charity auditors of the importance of their role in drawing attention, within their audit report, to any financial risk arising from a material pension liability.

We know that many charities are currently facing a huge financial strain whilst also playing a crucial role in the Coronavirus response. Whilst mindful that reporting can feel like a burden, especially at times like these, it remains really important that charities not only ensure they are taking an active approach to managing  significant financial risks like pension deficits, but also that this is reflected and explained transparently in their accounts.

Read further information on charities’ financial responsibilities and risk management:

Specific advice on managing a pensions scheme deficit can be found via the Pensions Regulator and the Financial Conduct Authority.

The Commission had also issued advice for charities during the COVID pandemic, including managing financial difficulties.

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