The Telegraph (United Kingdom)
July 30, 2013
By Simon Johnson
A leading expert warned that UK-wide charities would be duty bound to make good their pension deficits immediately after separation no matter how large and the burden could force some to close.
Many currently have recovery plans in place to eliminate the shortfalls over a decade or more, but present EU rules do not permit any such delay if pension schemes operate across international borders.
This would hurt charities operating in both a separate Scotland and the rest of the UK with large deficits they are currently trying to whittle down. Many are already struggling thanks to a drop in donations caused by the economic downturn. [EXPAND Read more]
Among the organisations that have recently started lengthy deficit recovery plans are Barnardo’s, Save the Children, and the Growth Plan, a scheme that covers around 1,500 charitable organisations.
The Institute of Chartered Accountants of Scotland (ICAS) highlighted the EU rules earlier this year and warned they could potentially force many cross-Border companies into bankruptcy after independence.
This newspaper revealed yesterday how the same regulations would mean Britain’s universities having to make good a £9.8 billion deficit in their pension scheme immediately after independence. However, it has not been disclosed that the regulations would also affect charities.
David Davison, a consultant who sits on the ICAS pensions committee, claimed money earmarked for good causes would “undoubtedly” be siphoned off to eliminate deficits.
He described as “extremely misleading” a claim by John Swinney, the SNP Finance Minister, that the deficits had arisen thanks to UK Government mismanagement and could be easily resolved by striking a deal with the EU.
The Finance Minister has cited a special deal for cross-Border schemes between the UK and Ireland that gave a three-year grace period but Mr Davidson said the issue was “very difficult” to resolve.
Mr Davison, the director and owner of Spence & Partners, a firm of actuaries, said: “The Scottish Government will look to negotiate with the EU but they are in unchartered territory.
“Even the exemption applicable to the Republic of Ireland doesn’t go anywhere near far enough to deal with this issue so they’re going to seek even greater latitude on this and I think it’s going to be a difficult hurdle for them to get over.
“Sadly charities will potentially have to close if they don’t have the money to fund their liabilities in full. It is very, very difficult to try and solve this.”
Even if the EU granted a three-year grace period, he said this was “nowhere near enough” for charities that require at least 10 to 15 years to eliminate their deficits.
Gregg McClymont MP, Labour’s Shadow Pensions Minister, said: “Charities across the UK are facing difficult challenges and will be hugely concerned to learn that If Alex Salmond gets his way the funding shortfall in their pension schemes would by EU law have to be filled overnight”.
The EU’s Pensions (IORP) Directive affects “defined benefit” pension schemes, which offer employees a guaranteed retirement income based on their salaries and years of service.
It states that cross-border companies must have pension schemes that are “fully funded” at all times and they are not permitted to make good any deficit using a recovery plan spread over several years.
According to its 2012 annual report, the part of the Growth Plan that is a defined benefit pension scheme had a deficit of £147.6 million at the date of its last valuation in September 2011.
The recovery plan put in place by its managers, the Pensions Trust, started in April this year and will attempt to eliminate the deficit over the next decade using extra contributions from its member charities.
However, its 2023 timetable for eliminating the shortfall is seven years after Alex Salmond’s 2016 deadline for Scotland to be independent if there is a ‘yes’ vote next year.
Barnardo’s, the UK’s largest children’s charity, has a defined benefit scheme that was closed to new members in 2007.
Its latest annual report states that its deficit had grown to £83.9 million by March last year and a recovery plan has been put in place that will take a “number of years”.
Save the Children, an international children’s charity based in the UK, had a deficit of £33.6 million. This is being met under a recovery plan that will mean the charity paying higher contributions until September 2021.
Cancer Research UK, the UK’s largest charity, also has a scheme that has been closed off. Its deficit is £61 million and a plan is in place to make good the shortfall by 2023.
Mr Swinney called for talks with the EU for a grace period if Scotland separates but said: “These deficits exist now as part of the union and are nothing to do with independence.
“The reality is deficits in defined benefit pension schemes are a product of the failed financial management of these schemes within the UK.”
Cancer Research UK refused to comment and Barnardo’s said any change to its schedule of payments would have to be negotiated by its pension trustees. The Pensions Trust and Save the Children did not comment. [/EXPAND]