Giselle Davies & Ellis Pugh discuss how to handle liabilities outside your control
- Defined benefit pension schemes can risk creating a funding deficit.
- Avoiding insolvency is paramount.
- Robust risk management is required to manage the issue.
While hidden liabilities come in all sorts of shapes and sizes, the fact that the sector is currently sitting on a very substantial pensions liability has been known for some time. A recent paper indicates that the top 40 charities in England and Wales have pension liabilities totaling £7bn. Clearly this is a problem, particularly where a charity’s pension liability compares unfavourably to its unrestricted reserve funds or annual income (the Hymans Robertson report suggests that for the 40 charities concerned the £7bn compares with £38bn of reserves and £12bn annual income respectively). For an individual charity, the comparison may be significantly less favourable.
Funding deficits: a ticking time bomb
It is defined benefit pension schemes (DBS), sometimes referred to as ‘final salary pensions’, which carry the risk of a funding deficit and related liability for employers. DBS payments to retired employees are
