1 London Street,
+44 (0)118 951 6200
In the current climate charities are increasingly being pushed to insolvency by pension scheme deficits. In 2010 the top 5,000 UK charities recorded a combined pension deficit of £1.66 billion. Of this number in excess of 500 saw their pension deficit double between 2008 and 2010 according to data website Charity Financials.
How should the trustees of a charity or not for profit organisation faced with a pension scheme deficit deal with that deficit and could the trustees be personally liable for any shortfall that the charity cannot afford to make up? The answer depends on whether the charity is incorporated or not.
The trustees of an incorporated charity are protected from personal liability provided they perform their role properly and to the best of their abilities.
It is important that trustees properly consider the full extent of the current and prospective pension liability. Ignoring the liability and allowing the status quo to continue once the trustees are aware of a problem (or should reasonably have been aware), or failing to consider a pension deficit because the topic is either too complex or it is hoped that it will resolve itself, can lead to personal liability for the trustees for some or all of the deficit. The trustees should therefore seek professional advice as early as possible, properly consider it and, if appropriate, act on that advice.
Sometimes the advice may be that the trustees should do nothing but keep the situation under review, but by taking professional advice and considering it carefully, the trustees should be sufficiently protected against any suggestion that they have not performed properly and diligently.
The general position for unincorporated charities is that trustees are personally liable for the debts of their charities, but they can call on the assets of their charity to reimburse any personal cost to themselves (assuming there has been no negligence or fraud). However, if there are insufficient trust assets to cover a debt and the unincorporated charity is pushed into insolvency, the trustees can be financially vulnerable in their personal capacity. This was the case in the Hirwaun YMCA case where the chairman was found to be personally liable for the charity's pension scheme deficit even though it was a small historic deficit that the current trustees had no knowledge of.
What about those charities who only recently incorporated and so had incurred a liability for part of the deficit whilst unincorporated?
There is no simple answer to this question as it will depend upon the processes adopted and agreements reached with third parties at the time of the incorporation. We would need to see copies of correspondence with pension scheme suppliers along with any governing rules or admission documents in order to comment further.
So what should you do?
There is no generic advice that can be given to trustees who are worried that they may be facing a personal liability for a pension scheme deficit, other than to reinforce the point that trustees should always pay close attention to their charity's financial reports and should ask questions if something is unclear. If an area of particular concern arises then appropriate professional advice should be sought promptly.
For an incorporated charity, as long as the trustees have been diligent and have sought advice, considered it and acted on it if necessary, then there should be no risk of personal liability. But, for unincorporated charities and those who only recently incorporated, there is a heightened risk and the situation should be addressed promptly by taking professional advice.
If you would like to discuss any matter relating to the topics discussed in this article, please do not hesitate to contact Philippa Roles.