The charity challenge - managing cash flow in tough times

The impact of Covid-19 is being felt by all organisations, but for many charities the impact is likely to be extreme and, in some cases, existential.

For charities, the spectre of reduced income (potentially both short- and long-term), practical barriers to fulfilling charitable objectives, and increasing pension scheme deficits all contribute to a perfect storm. And all of this is going on whilst these organisations continue to try to provide critical support to some of the most vulnerable in society.

To focus on just one issue, short-term liquidity is likely to be high up on executive and charity trustee agendas. We have heard much about the support available to employers to help them ride out an expected reduction in liquidity, but many of these are likely to come with additional reputational issues for charities. For example, whilst staff can be furloughed, is that reasonable and is 80% of pay appropriate? Or will topping up salaries (and pension contributions) add to the liquidity strain? Even if furloughing makes sense financially, does it mean charitable support is no longer being provided when arguably it is needed the most? Other levers available to typical corporates are also not available to charities; there are of course no shareholders and dividends, so no tap to turn off here.

For many established charities, plugging deficits in defined benefit pension schemes represents a significant and ongoing cash outflow. In these extreme times, many are therefore asking their pension scheme trustees to help them out by reducing or suspending contributions. Helpfully, the Pensions Regulator has recognised that in some circumstances reducing or suspending contributions will be the right thing to do; their page for employers is well worth reading.

This is, of course, not a risk-free option and there is no free lunch. A plan will be needed to make good the shortfall in contributions at a future date, and charities are likely to need to consider what additional security could be provided to mitigate the potential detriment to the scheme. Constructing a cohesive and realistic plan of action is likely to be difficult in fast moving times, and charities will therefore need to think carefully when positioning any request to their pension scheme trustees.

We all hope that there will be further support made available to charities in these challenging times. In the meantime, we’d encourage all charities who sponsor defined benefit schemes to work collaboratively with their advisers and pension scheme trustees to work out what the right thing to do is, both for the pension scheme members and for the charitable objects of the organisation.