Risk & Economy » Public Sector » Charities lacking clarity over pensions accounting

PROPOSALS from the Financial Reporting Council (FRC) may leave charity finance directors sleeping a little uncomfortably at the moment.

A consultation document issued in October has proposed a methodology which would see most, if not all, organisations participating in multi-employer pension schemes disclose their deficits on their balance sheets.

The existing accounting standard (FRS17) provides the ability for organisations to disclose on a much less onerous defined contribution basis should they feel they are unable to identify their share of assets and liabilities on a consistent and reasonable basis.

This has led to numerous inconsistencies where one organisation participating in a scheme chooses to disclose defined benefit liabilities in full, while others in the same or a broadly similar scheme disclose just their defined contributions.

One can’t help feeling that the FRC’s review is a reaction to last year’s parting of ways between the Citizens Advice Bureau and its former auditor Baker Tilly [see box], which resigned when the charity would not accept its advice that it should disclose its pension debt within its annual accounts.

While some in the not-for-profit or third sector have sought to defend the status quo, I can’t help feeling they are missing the point.

The key question that should be asked is: without disclosing, is the organisation providing a true and fair representation of its financial position? Surely, if there is a defined benefit scheme in place and the organisation is funding the deficit for it, then the only real answer to this question must be ‘no’.

While FRS17 and IAS19 are far from perfect, they do at least both ensure what can often be a material liability is recognised and people are able to make a fair assessment of its potential impact on the organisation.

Identifying what matters
Given the numerous employers that do disclose, I also find it difficult to accept the contention from others who claim they cannot identify their position on a reasonable basis.

The local government pension scheme, for example, has established a sophisticated and cost-effective mechanism to provide the figures and yet some participants chose not to avail themselves of the information. Would a donor, funder or bank feel misled if they subsequently discover the accounting information was omitted and the organisation ultimately became insolvent?

Assuming these changes are adopted, charities, and other organisations participating in these multi-employer schemes, will need to decide on the exact basis they would look to disclose. The draft FRS 102 proposal suggests using a net present value basis on which to establish the past service deficit contributions, which would be likely to produce a higher level of liability than would be the case on the current FRS17 / IAS19 disclosure.

This could encourage more organisations to seek to produce figures based upon the current more detailed approach, which could cause complications for scheme administrators, such as the Pensions Trust, that do not provide this service at the moment.

For organisations not already disclosing their liabilities, this move could be very material. Assuming a £100,000 per annum deficit contribution over 15 years, using a discount rate of 5% per annum, this could negatively affect the charity’s financial position by about £1m and, in some cases, could result in a negative balance sheet.

The proposed change would produce greater consistency and transparency amongst organisations participating in these schemes, although it will undoubtedly be very painful for some to implement, especially at an exceedingly challenging time for a hard-pressed third sector.


Baker Tilly quit as auditor of Citizens Advice Bureau due to a disagreement over the charity’s pension accounting.

The firm resigned at its 2011 annual general meeting, and the news came shortly after Citizens Advice treasurer Mike Weaver stepped down after just four months, reported sister publication Accountancy Age in 2011.

Citizen’s Advice’s pension pot has a growing deficit, which leapt from £19.4m in 2006 to almost £36.5m by 31 March 2010. The defined benefit scheme closed to new entrants in 2008.

The charity insists that “it is not possible to separately identify assets and liabilities relating to Citizen’s Advice”. For this reason, it cannot make provision under FRS12.

However, Baker Tilly disagrees with this assessment and had consequently given a qualified opinion on the accounts, calling for a provision of £8.3m to be made at March 2010.

A Citizens Advice spokesman said in 2011: “The reason they were not signed off at the AGM was one of timing only. There is a technical issue over the treatment of our pension liability but lots of charities have a similar issue. We are confident the accounts will be signed off by the auditor in the normal way.”

Finance director Alistair Gibbons said differences in interpretation between accounting standards FRS12 and FRS17 underpin the dispute, arguing even accountants cannot agree on the issue and it is unclear how the two interact.

At the time, he said FRS17 was considered to take precedence over FRS12. Provision for the pension scheme’s full liabilities was therefore not made, and the charity decided to honour this decision despite the risk of an accounts qualification.

David Davison is head of public sector, charity and not-for-profit actuarial firm Spence and Partners