Issued: 6 October 2004
Q1 – What pensions are charities currently offering and how should they assess their situation in order to devise a future strategy?
In common with the corporate sector, the majority of charities have now closed their Final Salary Schemes to new entrants. The trend has then been to turn their backs on trust-based products in favour of contract-based products with insurance companies. At the same time, in a desperate bid to curb increasing costs, many employers such as stakeholders and personal pensions have significantly reduced contributions. The result in many cases has been very poor take-up of the new arrangements.
Many of these scheme closures took place before the emergency regulations were introduced in June 2003, which effectively imposed a heavy penalty on the winding-up of schemes of solvent employers.
Q2 – Are there any special factors affecting charities which they should take into account?
Trust-based products require a greater commitment by the employer to their employees. Employers need to be certain that they are willing to make such a commitment. Those that can’t should look to contract-based products.
The set-up costs and ongoing commitment to administer an occupational scheme on your own are generally prohibitive to all but the larger established organisations.
Fortunately, the sector is well serviced by industry-wide and multi-employer schemes which even allow access to high quality trust-based products at reasonable cost to organisations with just one employee.
Q3 – If a small charity has a current occupational pension scheme, should it consider closing it? Why? How do you recommend this should be done?
If it has not already done so, it should review its occupational pension arrangements.
Employers' balance sheets are no longer immune from having to recognise the funding level of the occupational pension scheme and this can severely affect the employer’s solvency.
Closing the scheme is just one course of action and may lead to increased costs in the short term. Care should also be taken not to trigger a wind-up, particularly if the scheme is in deficit.
Before any decision is made, it is important to establish your drivers for change. Appoint an independent professional adviser to help in your review and learn from the mistakes made by organisations which are now changing for the second or third time in as many years.
Q4 – What role does a company pension scheme play in recruiting new staff? Bearing in mind many charities are now employing professionals from the commercial sector where salaries and pension benefits are more generous.
For many organisations, apart from pay, pensions will be the only other monetary benefit. A pension of some description is expected by employees. For organisations that recruit key staff from the government, local authorities, schools or the National Health Service, having a decent pension arrangement is essential. In whatever sector you compete for staff, you need to ensure that your arrangements are comparable with the competition.
Q5 – What size does a company's pension scheme need to be before it needs dedicated staff to administer it? Can the management of a pension scheme be outsourced, who to? Cost of outsourcing?
Pensions are complex and mistakes can be very costly. If an employer undertakes to administer their scheme in-house, then they will need at least one person whose primary role is to look after the pension scheme, irrespective of the size of the scheme.
All aspects of scheme management can be outsourced including trusteeship. This can be achieved through managing a series of contracts with a number of providers or through one of the few organisations that can provide all the services.
The cost will depend on your requirements, though typically you get what you pay for.
Q6 – Should a small charity without an occupational scheme offer advice to its employees about the pension options open to them? Is there a liability option here?
There is no requirement for an employer to offer advice on pensions or any other financial product or benefit.
Employers with five or more employees who do not offer any pension arrangements, will need to comply with Stakeholder legislation and nominate a Stakeholder provider as well as provide access and general scheme information.
An employer who wants to go further and offer financial advice to employees needs to make sure this is provided by an appropriately authorised and regulated firm.
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