A major children's charity where staff are about to strike over pay is paying millions of pounds a year to plug a pensions black hole.
Employees of Action for Children (AFC), one of the UK's biggest charities, voted overwhelmingly in favour of industrial action on Monday night after years of wage restraint.
The dispute has put the spotlight on executive pay in the voluntary sector – and has also revealed the huge amount paid by many large charities to plug their pension deficits.
AFC has confirmed to BuzzFeed News that donations from the public – among other sources of funding – have been used to pay these bills.
The Unite union's national officer, Sally Kosky, told the Press Association that "dedicated workers at the charity have seen their wages virtually frozen for the last five years".
According to Unite, the charity imposed a 1% pay award for 2015–16 and excluded 40% of its workforce from a cost-of-living increase. Union leaders told The Guardian that while they appreciate that charities like AFC, which rely on contracts from local and central government, have to tighten their belts, workers have been angered by pay increases for senior managers.
The charity's accounts show that four of its leaders earn over £110,000 a year and 21 members of staff earn over £60,000.
However, the accounts also describe how a 2012 valuation of the charity's pension fund (which had closed two years earlier) found that it had a deficit of £108 million. A recovery plan was put in place, and as a result, the accounts state, the charity is "paying deficit contributions of £7.5m for a period of 17 years commencing from 1 April 2012".
Sir Tony Hawkhead, the charity's chief executive, told BuzzFeed News: "We are legally obliged to pay £7.5 million a year towards our pension deficit. Pension deficits are not uncommon in the charity sector, largely due to increasing life expectancy."
He said the bill was paid out of "all income sources". These, he said, included "local authority contracts, sale of empty properties, investments managed by the Methodist Church, and voluntary income".
He added: "Our main aim is to achieve a sustainable base in very challenging operating circumstances that will allow us to continue providing services to the many thousands of children we support. For us, protecting our former and current employees' pensions is of vital importance – it is far more than a legal requirement."
AFC did not provide a breakdown of how much funding came from each different source. Its accounts show that the overwhelming proportion of its income is given by outside institutions – usually local and central government – for the purpose of contract delivery: just under £150 million, as opposed to around £17.5 million in voluntary income – donations, gifts, and legacies.
The charity regulator, the Charity Commission, has said its main concern regarding pension deficits is that they should be accounted for and that trustees should be "transparent" about how charities deal with them.
AFC is far from the first charity to run into problems with its pension fund. In February this year, the Sunday Times reported that the top 40 charities have a combined £5.5 billion black hole in their accounts.
The paper claimed that the Guide Dogs for the Blind Association "received more than £60m from the public in its last financial year, but more than 10% of that amount was used to pay off the pension fund deficit of £22 million".
In 2014, Richard Farr, the head of the pensions advisory team at accountancy firm BDO, claimed it "would not be uncommon" for more than 10p in every £1 donated to a charity ending up being used to support its pension scheme. He told Civil Society Finance: "If the public realised that their donations are going to fund charity pension debts I wonder what will happen."
A year before that, Barnardo's announced the closure of its final-salary scheme to all members – at that point it had a shortfall of over £80 million. The shortfall has now reached £96 million, despite the charity having paid £5.2 million into its fund in the past year.
Mark Kerr, a researcher in social policy at the University of Kent, told BuzzFeed News that staff cost issues were also caused in part by charities taking over delivery of services that had previously been done by local and central government. Some staff had generous public sector deals that were carried over when local authorities transferred their services, while the charities in turn "had to offer very generous public sector remuneration packages to be competitive", Kerr said.
"Last summer, the British Association for Adoption and Fostering went in to administration largely due to their pension deficit," he said. "The financial situation of the larger children's charities such as Action for Children and Barnardo's for me is a major concern, not in relation to their financial survival, but the effect it has had on their campaigning."
Kerr warned that financial threats to some charities could make them less likely to challenge their main funder, the government.
"Currently under way are extremely controversial and wide ranging reforms of children's services," he said, "as well as significant budget cuts to services for our most vulnerable children, yet charities such as Action for Children and Barnardo's have been noticeably silent. But then he who pays the piper plays the tune."
On the strike vote, Hawkhead, AFC's CEO, told BuzzFeed News the charity had been in discussion with the unions for six month to reach an agreement.
"In an organisation which has a workforce of nearly 5,000, there are around 1,100 trade union members, of which only a quarter of members voted," he said. "We are saddened by the ballot result, which in real terms means that only 5% of staff backed industrial action.
"However, we respect the right of trade union members who choose industrial action. Our top priority is to ensure this has the minimum disruption to our frontline services. Action for Children exists to help the country's most disadvantaged children and families. We have been working closely with operational managers to put in place contingency plans with the aim of maintaining business as usual for people who depend on our services."
Unison general secretary Dave Prentis said: "Staff at the charity are dedicated and work hard to ensure the best possible outcome for the vulnerable children and their families that they help. But for too many years this has been taken for granted by senior executives, who now rather unfairly think they can impose upon, rather than negotiate with, employees. There is enough money to give staff a pay rise, and it's high time the charity started to recognise that its best asset is its staff."