The news that charitable organisations throughout the UK are in trouble with their defined benefit pension schemes comes as no surprise. Even charities cannot be immune from the inherent instability of these schemes.
However, as charities have one primary source of income – donations – there is only one way that the deficit can be eliminated. Without government intervention in terms of support or permission to wind up the schemes, a significant proportion of the amounts donated to charities over the next few years will have be spent on propping up the pension schemes for the workers rather than on the particular charity that the donor believes he or she is supporting.
One can only imagine the negativity of the donors’ reaction who gives on this basis, on finding that not only are they contributing to the current lifestyle of the employees of the charities, but that it extends to providing an income for life for these workers. Donors are under the illusion that their donations are alleviating suffering by the end recipients of the charity rather than featherbedding the retirement of the workers.
In response to this news, the usual answer has been trotted out; charities require good staff and pensions are part of the way that good staff is attracted. This seems to ignore the fact that the majority of private sector firms only provide defined contribution schemes and they seem to have no difficulty attracting high calibre staff.
Given that all employees in the private sector will now be auto-enrolled into defined contribution schemes it is hard to see why the charitable sector isn’t following suit. No one is arguing that employees of charities shouldn’t be remunerated in line with their job but schemes that put long-term liabilities onto charities which are funded by donations just don’t make any sense. So why is it happening?
The true reason is that charitable organisations don’t see themselves in competition for staff from the private sector but from the public sector. And the taxpayer underwritten defined benefit schemes of the public sector are too big a benefit to be ignored when it comes to recruiting staff.
Once again, the public sector’s privileges are undermining the natural dynamics of the market, as its ability to recklessly support uneconomic schemes based on the ability to tax the nation means that the charities who are struggling to compete for staff have ended up taking on liabilities that are just reckless for organisations dependent upon donations.
The removal of the public sector DB (defined benefit) pension scheme is important to alleviate the distortion it has caused in the market and it will remove the overhang that is currently being caused. Charity begins at home, but at the rate we’re going; only overseas charities will actually be able to maintain operations in the UK.
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