Issued: 14 December 2004
Though charities face the same mounting pensions expense as any business, they can feel the need to provide for staff in retirement particularly acutely
'Charity' has its Latin root in both 'love' and 'expensiveness'. Indeed UK charities' commitment to pension schemes for their staff seems to make the latter definition increasingly appropriate.
Perhaps because of the ethical angle, charities can be among the most reluctant of employers to renege on their pension obligations. As Carol Hatcliff, head of personnel at The Woodland Trust, sums up: "As a 'responsible' employer we feel we have a moral duty to offer and encourage use of the pension scheme." Stephen Nichols, deputy chief executive at The Pensions Trust suggests that charities have a "different attitude" from the commercial sector and can be much more reluctant to close a scheme. "Charities are particularly staff oriented," he says. "The wealth of any one organisation really is its staff". Such employees often depend on their pension offering, he says, because "unlike in the corporate sector it is the only real benefit they have apart from pay." Jon Whitty of Sussex Wildlife Trust concurs: as far as benefits go, the charity's pension is an "essential" one.
Final salary pressures
Because of the emphasis on retirement benefits, a pension scheme arguably becomes even more important for attraction and retention than in other sectors. This is particularly so when many charities must compete for staff with government agencies, local authorities and hospitals, which have notoriously generous pension arrangements. For example, Watson Wyatt recently calculated that the NHS scheme is worth over 30% of pay. The previously publicised figure of 20% is inaccurate, it says, because its benefits are guaranteed by government, thus making redundant the official allowance for the possibility that benefits might not be paid (as used in the private sector). With such a valuable retirement package, it seems hardly surprising that Toni Leden, appeals director for the Christie Hospital NHS Trust, is so sure that "our NHS pension is a help when recruiting, as people think it can be trusted".
Watson Wyatt partner Stephen Yeo points out that "no private sector guarantee is as good as one from government", and knowing the real value of pension benefits is important because if employees and management underestimate it, "they may make incorrect decisions about changing jobs and pay negotiations". With charities going head to head against civil service pensions like this, a final salary (FS) scheme can sometimes be "crucial", according to Mr Nichols. For this reason, he says, "FS continues to have a future in the charity sector". This, of course, makes it no less expensive. One large charity with 1,200 staff (wishing to remain anonymous) is dealing with a benefit expense clearly in the magnitude of the NHS pension as a proportion of pay: an average employer contribution of 23%, with the employee contribution soon rising from 3% to 5%. Perhaps unsurprisingly, this pension has a 98% take-up rate among staff. Equally unsurprisingly, the scheme finds regulation increasingly expensive.
There comes a point where this cost pressure becomes insupportable, no matter how important a FS arrangement is to a charity. Of The Pensions Trust’s 29 ring fenced FS schemes, 20 are closed to new members. However, the decision to close these was taken when solvent employers could wind up schemes on an MFR basis rather than full buyout cost. "Because that exit strategy no longer exists," Mr Nichols says, "some are talking about even reopening these schemes for new members as a way to control cost."
Others seem to be closed for good, just as in UK employment as a whole, despite relentless legacy expense. The Army Benevolent Fund's FS scheme, for example, closed to new entrants in 1997 but employer contributions to it are now 21.3% of pay. It has found FRS 17 particularly costly. Another medium sized charity (£4.6m annual income and 52 staff) says that increasing expense is "one reason we do not have [a FS scheme]". However, it has found staff response to its stakeholder offering to be far from enthusiastic: "all current staff with pensions have made their own arrangements elsewhere. Those who were in the scheme have transferred out or are no longer employed by us."
On a personal level
This sort of record on stakeholder seems to be repeated throughout the charity sector. Most of the those informally surveyed by PW had stakeholder take-up rates of zero. Mr Nichols concurs: "Stakeholder has not captured the imagination of younger staff, who are more likely to choose to contribute to student debt repayment or housing." He adds that even the topping up of mobile phones is often coming higher than pension contributions in younger employees' priorities.
The stakeholder exception among surveyed charities was Sussex Wildlife Trust, which since it began running one in tandem with its own scheme has seen it taken up by nine employees from a total of 35. (It does, though, benefit from a 6% employer contribution.)
By far the most common option among surveyed charities, though, was a group personal pension (GPP) complying with stakeholder requirements. The Terrence Higgins Trust, with 250 permanent staff and a £13m annual income, only just closed its FS arrangement in 2004, choosing a GPP instead because it would be "more cost effective". Its employer contribution to the replacement scheme is 8% of pay (for staff over 50), with employee contributions of 6-7%. This seems fairly typical – as a few other examples, LEPRA also contributes 8%, with staff putting in at least 3%; Sussex Wildlife Trust has a 6% employer contribution and minimum 4% employee one; and a typical large scheme (anonymous) pays in 3% above the employee’s contribution up to a maximum of 9%.
A notable exception to this sort of GPP contribution was the Musicians Benevolent Fund, with a whopping 17% employer rate. Yet even with such an explicit figure of remuneration, only half of staff take it up. This kind of take up is perhaps rather typical: The Pensions Trust estimates the average take up rate among all eligible staff of its 4,150 member organisations to be around 45-50% (though there is no exact figure, because the sector makes great use of ‘bank staff’, some of its schemes are closed to new entrants and it can be difficult to keep up with the development of the 4,150 member organisations). Some charities, of course, have much higher take up rates than others, not always related to employer contribution rate. For example, the GPP take up is 80 % at the Disabled Living Foundation, 70% at the Woodland Trust, over 90% at both Demand and the Army Benevolent Fund.
A mobile workforce
LEPRA, with a staff take-up of 55%, chose a GPP scheme for reasons other than cost alone, as its finance director Ian Gibbons explains: "We transferred from a FS scheme, fortunately, in 1995 after consulting with staff who wanted their pension schemes to be easily transportable." The same reason of "portability" was given by another large charity (412 staff and £12m annual income) with a GPP.
The mobility of charity staff, though, depends on the organisation’s size, as Mr Nichols observes: "Smaller organisations can be quite vocational for those involved, so there is not much staff 'turnover' as such. The larger the charity, the higher the turnover rate."
Many of The Pensions Trust's schemes are indeed quite small. One of the main problems in administering pensions for such organisations is data flows. "Charities, especially small ones, have less resources in terms of payroll staff and systems," says Mr Nichols, "so we need to be pro-active in extracting the right data at the right time. Take a donkey sanctuary down in Devon, for example: its priority is looking after donkeys, not organising to pay pension contributions at the right time." The Pensions Trust has a compliance department that takes care of reporting matters such as late contributions, and it used to have to do so fairly often. Thankfully, the contributions reporting has softened recently with Opra's change to a more prioritised ‘traffic light’ system last year. Nonetheless, "data remains a big issue" for The Pensions Trust, especially as charities can transmit it any way they like: "we still get hand written schedules," exclaims Mr Nichols.
Another issue, unsurprisingly, is the regulatory burden. Though tax simplification should make things easier, especially as the bulk of The Pensions Trust's membership is at the moderate end of the pay scale, it will in no way offset (as government claims) the cost of the Pensions Act 2004, particularly the pension protection fund (PPF). Mr Nichols estimates that tax simplification will save the Trust perhaps several hundred thousand pounds, but the PPF levy is likely to cost "a couple of million". Though having little against the moral angle of the PPF and its potential to "help restore confidence in pensions," Mr Nichols shares many pensions professionals' desire for the risk based levy to be introduced as soon as possible.
There are other aspects of the levy that urgently need to be ironed out too: "How will it treat multi-employer schemes?" he asks. "If an organisation within a multi-employer scheme goes bust, who pays up? Are the other employers in the scheme expected to cover it and continue their PPF levy?" This uncertainty over what would actually trigger any kind of PPF compensation to a multi-employer arrangement shows, Mr Nichols says, that "the government is still grappling with how such schemes fit in, despite the fact they are being seen as part of the solution to our pensions problems".
When asked if there is any particular regulation he would like to change to make administering pensions on the scale of The Pensions Trust easier, Mr Nichols is quick to answer that he would abolish change itself. "I am against more change," he says, "whether now or later. The Government really doesn’t make things easy for us. I would like them to say: 'this is how pensions regulation will be, and it will stay like this'."
Continuing paternalism
Yet from charities' perspective, 'burden' may be the wrong word for the expense and regulation of pensions, Mr Nichols suggests. Their continued paternalism means that they see it as "another cost". Whether such costs could mount to the point where charities do regard them as something more descriptively negative, only time, longevity and government's trajectory on legislation will tell.
The Pensions Trust – design and benefits
The Pensions Trust administers pensions for the charitable, social, educational, voluntary and not-for-profit sectors.
It was established in 1946 as the Social Workers Pension Fund, to provide decent pensions for those working in the charitable and voluntary sectors. From humble beginnings with 271 members and net assets of a little over £5,500 in its first year, it grew rapidly in the 1970s and '80s (with its name change in 1987) and now has 108,000 members and pensioners with assets of over £2.3bn. These come from 4,150 employer organisations (a figure that increases by around 20 each month), which have a choice of various scheme designs including:
- A career average revalued earnings (CARE) scheme: Launched October 2001, this scheme provides a core salary related benefit of 1/80th of total earnings each year. Each year of pensions credit is revalued annually by the increase in inflation. So far 27 employers have taken this option, representing some 500 scheme members. It is typically taken on by those looking to change their pension arrangements for new employees, so strong growth is expected from staff turnover within the employers who have joined, as well as further employers taking it up as CARE products become more accepted.
- A defined contribution (DC) plan: This scheme offers two investment options. The Growth Plan is a mixed asset fund that allocates members investment credits reflecting its long term performance. The Unitised Ethical Plan is a traditional unitised fund with an external asset manager, picking stocks using ethical criteria from a wide range of asset classes.
- Multi-employer final salary (FS) schemes: The Trust administers five of these schemes, including The Social Housing Pension Scheme, The Scottish Council for Voluntary Organisations Pension Scheme and The Northern Ireland Charities Pension Scheme.
- Stand-alone FS schemes: Of its 29 stand-alone FS schemes, 20 of them closed to new members. Organisations with these ring fenced schemes include Christian Aid, Oxfam, Help the Aged, YHA and Save The Children.
Funding levels vary from scheme to scheme, though in aggregate it is currently estimated at around 90-95%. Each organisation’s contribution rate is determined in conjunction with the actuarial valuation process. The organisation chooses its own contribution split between employer and employees – a typical ratio is 2:1.
According to Stephen Nichols, for some smaller organisations that merely want to "tick the box" stakeholder, a contract based product from an insurance company may be appropriate. However, he says, for those that want to take more of an interest in provision, the benefits of a trust based model can be considerable: "For example, we have a Trustee Board running a sophisticated investment structure with various external investment managers. If one is not performing then the Trustee can replace them."
The Pensions Trust has just over 160 staff, with 16 Directors of its Trustee Board – half member nominated and half voted for by the employer. This trust basis offers a chief benefit over a comparably priced insurance contract pension, according to Stephen Nichols: "If an external investment manager is not performing then the Trustee can replace them without any problem. And if something goes wrong then we have a compliance department that will look after members' interests. With an insured arrangement it is different: it can end up as you against the insurance company."
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