Charities could reduce annual pension contributions by 65% with bespoke funding route

Charities could reduce annual cash contributions to their defined benefit (DB) pension schemes by between 35 and 65 per cent if they choose a bespoke funding plan, according to Hymans Robertson.

Analysis from the firm’s annual report on DB pension funding in the charitable sector explained that the bespoke route would allow for charities to use assets to enhance the covenant support for the scheme, and therefore support a lower long-term objective or longer recovery plan, reducing the annual cash requirement.

The bespoke route is part of The Pensions Regulator’s (TPR’s) proposed twin track routes for its DB funding code, with ‘fast track’ being the other available route.

Hymans Robertson head of corporate DB, Alistair Russell-Smith, said: “The funding position of pension schemes in the ‘not for profit’ sector is, on average, worse than other sectors in the UK and with the new regime these deficit figures are set to increase by an estimated £1bn for the largest 40 charities as their schemes put long term funding targets in place.

“Charities are, therefore, more exposed to increased cash requirements under the new funding regime than other sectors.”

Further demonstrating this vulnerability, the report also found that the proposed new funding regime from TPR would see pension deficits for the largest 40 charities in England & Wales increase overall by a between £1bn and £3.5bn, as schemes would be required to put in place long-term funding targets.

The average funding level of charities’ DB pension schemes was found to be 94 per cent, with 63 per cent of charities having closed their schemes to future accrual.

However, Russell-Smith further highlighted that there was a chance for charities to gain “tangible value from providing security to their pension scheme”, stating that this could be a way for some charitable organisations to “navigate the new funding regime whilst keeping cash contributions at current or even lower levels”.

He continued: “It has been a tough year for charities with fundraising and retail income plummeting while, simultaneously, demands for their services have led to increased pressure on expenditure. Cash to fund the pension scheme is therefore scarce.

“However, some charities do have significant balance sheets and unencumbered assets, which can be used to support the pension scheme and reduce cash costs. For example, a charge over charity property or investments can support a lower funding target or longer recovery plan which reduces the cash requirement down to more affordable levels.

“Opting for a bespoke funding plan would allow charities to do this and we calculate it could enable them to reduce cash contributions by 35-65 per cent. This approach allows investment returns to plug more of the funding gap as well as giving the pension scheme trustees the covenant visibility that they need under the new funding regime.”

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