Part three of a Pensions Insight investigation uncovers how some UK charities feel they are losing out because of the cost of providing public sector pensions

Charity

Cuts to local authority services as part of a wider policy of austerity has been a key feature of the Coalition government.

Charities can boost their own revenue by providing community support services local authorities will no longer pay for – such as running elderly outreach programmes and even children’s homes. Gareth Hopkins, pensions manager at the Children’s Society, says public sector contracts are an attractive prospect for his charity, but pensions are getting in the way.

In most cases charities employ public sector staff for the life of the contract and by law must continue to provide “broadly comparable” pension benefits.

If that was limited to contributions, says Hopkins, charities could live with that, despite the high cost. But those who take on the contracts are also liable for any increase in funding deficit during the term of the contract.

A sceptic might say local authorities are off loading this work to discharge pension liabilities

“You could win a contract worth £2m”, says Hopkins by way of example, “and be told that a deficit has accrued worth £200,000 at the end – which is almost impossible to price at tender.

“That wipes out 10% which, in real terms, could mean the charity is left propping up the contract with their own funds.”

“A sceptic might say local authorities are off loading this work to discharge pension liabilities”, he adds.

Towers Watson’s John Cockerton, who specialises in private sector contracting, says charities can structure agreements at the start of contract negotiations that ensure the cost of growing pension liabilities is passed back to councils with robust exit terms.

“It’s absolutely vital charities get professional advice”, warns Davison, “the difficulty for charities is that if they do these outsourcing projects on a not-for-profit basis.”

Cockerton agrees: “Many are not big enough to have the expertise to properly construct the agreements in such an esoteric area – charities are just not used to bidding for public sector work”.

It would be good to see a law introduced preventing local authorities passing on any pension liabilities that accrue during the contract term

Hopkins is clear about what he wants. “Ultimately it would be good to see a law introduced preventing local authorities passing on any pension liabilities that accrue during the contract term”, he says.

Progress is being made, in central government at least. The New Fair Deal, announced in October 2013, means charities and private sector firms that take on public sector staff are allowed to participate in the civil service and NHS schemes without taking on the risk of rising liabilities.

“It’s a game changer”, says Cockerton, “from their perspective they just pay contributions”. It seems a short step to extend those rights to local authorities. However, the general election – now less than a year away – could prove a stumbling block. The government will be hard-pushed to deliver the pension reforms it has already promised, let alone any new ones.

Special case

Charities are caught in a bind. Taking on public sector work not only helps charities better reach the causes they were founded to address, but could provide a steady stream of income. However, by the time the government reduces the pensions burden, the private sector might have won the most lucrative work.

Just as in the private sector, charities’ reliance on top-notch pensions to retain staff must end. The range of employee benefits has exploded over the last decade, giving organisations many more carrots to entice employees. If the public gets wind that charities are pouring millions into staff pensions, they will have to change anyway.

All charities are businesses

The multi-employer problem is one area where special dispensation for charities should be considered. But not everyone feels the same. David Griffiths, chief executive of disability charity ECAS, says “all charities are businesses. If [they] want to play with the big boys and compete for tenders [they] can’t cry foul when people want to treat them like a business”.

The Labour party does not have the credibility to reverse the Coalition’s cuts to public spending. Whoever wins the 2015 election will have to address the fundamental conflict between charities, business, and the public sector. This is a problem that will not go away on its own.

In the final part of this investigation Pensions Insight speaks to third sector pension scheme The Pensions Trust.