Charities must do more to explain pension risks

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The Charity Commission has published an Accounts Monitoring Report reminding charities that they should use their Trustees’ Annual Report to explain how they are dealing with the potentially serious risks posed by a pension scheme deficit.

This warning follows a review by the Commission of charity accounts with a pension scheme deficit.  The Commission identified 740 charities with an income of over £500,000 whose accounts showed a deficit and then it randomly selected 97 of these for a more detailed review.  This review forms part of the Commission’s wider programme aimed at checking charities’ compliance with the Statement of Recommended Practice (SORP).

The review found that only 31 of the 97 Trustees’ Annual Reports included an explanation of the financial implications of the charity’s pension scheme deficit and of the trustees’ plans for addressing the issue.

Pension deficits can pose a potentially serious risk for charities.  In the most serious cases auditors may use an “emphasis of matter” to highlight the risk to the charity’s ability to continue as a going concern.  It is therefore important that charities can demonstrate to their donors, beneficiaries and the public that they are aware of, and are appropriately tackling, the problem.

Charities with a defined benefit pension scheme should have a clear and up-to-date understanding of their charity’s financial obligations and a plan in place to deal with contribution increases.  This will inevitably involve setting aside unrestricted reserves and future income.

If an employer has a pension scheme deficit, the Pensions Regulator requires the employer and the pension scheme trustee to agree a recovery plan to address it.  In these circumstances the charity should take professional advice on the financial implications and what steps are necessary to address the deficit.

For more information please contact Sarah Forster or call 0191 211 7910.