The Third Sector will lose out unless something is done about the accrual of councils’ pension liabilities

More charities are seeking alternative ways to generate income. Gone are the days that the third sector are solely reliant on unsuspecting parties being approached to donate ‘just two pounds per month’.

The government has slashed public sector spending, including the budget of local authorities (LAs).  At risk of oversimplifying matters, LAs have responded by outsourcing some of their services.

Many charities have gone into public sector outsourcing (PSO) blind which, in time, could prove horrifically costly. Specifically, I am referring to the pension risk that can conveniently transfer to the winning charity.

Charities are required to offer eligible staff transferring under TUPE the right to a broadly comparable pension arrangement[1]. In real terms, this translates to a lot of money (and risk), which, importantly, charities are not considering, let alone pricing into their bids.

Pension risk can threaten the very existence of a charity

I understand ‘profit’ is a dirty word within some charities, but PSO should be self-sufficient. The cost of running public sector services should be covered by the contract price, with a little surplus (profit) to cover administration costs – third sector employees do not work for free.

One variable that can seriously impact profit is pension liability. Worse still, pension risk can threaten the very existence of a charity. 

One organisation to feel the pension’s bullet is People Can – the charity was driven into insolvency by their pension liabilities. People Can inherited significant pension risk after winning various public sector contracts. In the end, People Can realised a pension liability of about £17m which they could not afford to repay.

Many LAs find it perfectly acceptable to discharge pension risk as part and parcel of the deal

Pension risk relating to TUPE is huge, and must not be underestimated. There are ways and means of mitigating pension risk. Again, in danger of over-simplification, LAs should be asked to retain all risk related to pension liabilities, and this should be reflected in the commercial contract.

In practice, however, LAs are less than willing to oblige.

Each tender will be for the delivery of a particular service, not as an opportunity for LAs to offload their pension risk to the charitable sector. Many LAs find it perfectly acceptable to discharge pension risk as part and parcel of the deal, despite attempts to persuade councils that the practice is absurd. In fact, it would seem that LAs openly ignore their own guidance:

‘It is, therefore, recommended that the letting authority and contractor discuss with the relevant administering authority and its actuary, the best way to manage potential risks’[2]    

A cynic might say that the LAs are offloading pension liabilities

A cynic might say that the LAs are offloading pension liabilities as part of a rather grandeur de-risking attempt. However, I suspect the real reason is far more simplistic – the LAs, themselves, don’t understand pension risk.

It is important that charities gain pension and legal advice before committing to a particular contract, and charities should be prepared to walk away. Some charities seem to loathe this approach due to ‘reputational risk’ – which is nonsense. You are only as good as your next tender – all previous dealings are forgotten. 

I have not gone in to the various pension risks in detail, mainly because this would require a separate article (let the pension and legal professionals worry about this). The purpose of this commentary is to raise awareness. 

Charities need to make a stand

Until the third sector collectively refuses to take on pension risk, LAs will continue to pass on these liabilities as business as usual – charities need to make a stand.   

Trustees have a legal obligation to act in the best interests of the beneficiaries, and to safeguard the assets of the trust. I suspect the Charity Commission would take a dim view on how some charities are exposing their organisation to huge pension risk. One may even argue it is illegal. 

Gareth Hopkins is a pensions consultant. He tweets @MrHopkins


[1] The Secretary of State’s 2007 Direction on pensions

[2] Department for Communities and Local Government: London (December 2009)