Defined benefit (DB) pension funding improvements are expected to prompt a renewed focus on endgame planning in the charity space, Spence & Partners has said, with research suggesting that running on schemes to access a surplus may now be more viable.

The latest report showed that charity DB schemes have seen funding levels rise to 104 per cent on an FRS102 basis and 83 per cent on an insurance buyout basis.

The research also found that buyout deficits now average only 21 per cent of unrestricted charity reserves, as rising yields have shrunk DB schemes relative to charity balance sheets.

In addition to this, it revealed that just over a quarter (26 per cent) of charities are no longer paying deficit recovery contributions, with this proportion expected to rise as more deficit recovery plans come to an end.

And with deficit contributions ceasing, Spence suggested that the focus for charities will shift to endgame planning and reducing running costs, arguing that, for some charities, running on schemes to access a surplus may now be more viable, particularly in light of the initiatives being rolled out off the back of the government’s Mansion House reforms, with a growing number of viable endgame options is growing to consider.

In particular, Spence argued that while insurance buyout will now be in reach for some schemes, charities with smaller schemes should consider waiting for the public sector consolidator from the Pension Protection Fund (PPF) to come to market from 2026.

Furthermore, it said that charities with larger balance sheets that already manage their own investments could consider running on their DB scheme to access surplus assets in the scheme.

Indeed, Spence's analysis suggested that, if the DB schemes in the research were run on for the next 10 years, they could generate surplus assets for the sponsoring charities equal to an average of 8 per cent of a charity’s unrestricted annual income or 12 per cent of their unrestricted reserves.

However, there is room for improvement, as the research showed that while annual pension scheme running costs average £450,000 per annum, some of these costs could be reduced significantly by using the latest systems and a simplified governance model.

According to Spence, these changes could help cut running costs by 30 per cent, generating an average saving of £135,000 per year.

Commenting on the findings, Spence & Partners head of charity and not-for-profit practice, Alistair Russell-Smith, said: "Funding levels for DB schemes in the charity sector have improved dramatically in the last two years with rising yields. Many schemes are now fully funded on accounting and Technical Provisions bases.

“Furthermore, higher yields have shrunk schemes, meaning charities are now better placed to support them. Charities should review their DB endgame plans.

“Whilst insurance buy-out will still be right in many cases, it may be appropriate for charities with smaller schemes to wait for a public sector consolidator to come to market, and charities with larger balance sheets might consider running on their DB schemes to generate value for the charity and pension scheme members. After years of pain, cost and liability from DB schemes, charities could potentially start viewing their schemes as an asset rather than a liability.

“Our research also found that running costs for DB schemes can get very high if left unchecked, and average £450,000 a year.

"Whilst some of this is justified with data work such as the need to equalise GMPs, some of it can be removed by using the latest systems and a simplified governance model.”

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