There has been a huge increase in the number and size of not-for-profit organisations over recent years, fuelled by local authorities’ appetite for out-sourcing public sector services. Most of these bodies are small, run on tight budgets and receive much of their funding from the public purse. Significant growth in this sector continues as the government seeks to control its public spending by laying off liabilities to these private sector suppliers.
In order to compete for contracts, many of these organisations must offer final salary pension benefits. They have therefore been hit by a significant increase in pension liabilities as more realistic valuation assumptions become the norm.
Invariably these bodies join a local authority pension scheme and are provided with a contribution rate to fund for their staffs’ pension benefits and which they incorporate in to their budgets to tender for work for the period on offer. These budgets will generally be competitive with only small contingency margins and often based upon a fixed term.
But contributions to buy final salary benefits are unknown and are arrived at using a set of financial and demographic assumptions. Should these assumptions be overly optimistic then insufficient contributions will have been paid to meet the liabilities accrued and a scheme deficit will have built up.
Many not-for-profit organisations will have built up significant deficits which from this year will appear in their accounts and therefore be visible to everyone. So they need to find the money to fund the deficit as well as the cost of continuing to accrue benefits in the future which is continuing to rise.
There is also no escape route as it is almost impossible for such bodies to leave the local authority pension scheme, as exit will result in a more stringent valuation basis being applied with a commensurate increase in costs.
If the outsourced sector is to survive, it will require concerted effort on a number of fronts. The first step would be recognition of the problem and its magnitude among local authorities, trustees of the bodies, pension scheme trustees and advisors and for positive solutions to be sought and actions taken. The bodies in particular need to be looking at the position in which they find themselves and looking at the options open to them to minimise further risk exposure.
Spence & Partners, independent actuaries and consultants in Scotland and Northern Ireland