Increased pension deficits are placing further financial strain on charities that are already struggling amid the Covid-19 crisis, Hymans Robertson has warned.
The firm’s annual Charity Benchmarking Report, which looked at the largest 40 charities in England and Wales, revealed that three quarters of charities have a defined benefit (DB) scheme in deficit.
The average deficit for the schemes surveyed was around 19 per cent of net unrestricted income, with one charity reporting a deficit that exceeded their unrestricted income.
Hymans Robertson emphasised that upcoming regulatory changes, such as The Pension Regulator's (TPR) funding regime, are now expected to place further pressures on charities to pay off their pension deficits quickly.
According to the report, the average DB scheme has funding levels of around 92 per cent, however, just a quarter (25 per cent) of charities reported a pension surplus.
Furthermore, the average pension contribution was just 4 per cent of unrestricted net income, with only 2 charities paying contributions in excess of 20 per cent of their net unrestricted income.
The firm highlighted that whilst the majority (60 per cent) have closed their DB scheme to future accrual, market volatility stemming from Covid-19 had seen an increase in many scheme deficits.
Commenting on the findings, Hymans Robertson head of corporate DB, Alistair Russell-Smith, said: “The Covid-19 pandemic has placed many charities under significant financial strain with fundraising and retail income particularly badly hit and with a need to conserve cash.
“A delicate balancing act is needed between ensuring the sustainability of the charities and funding higher pension deficits.
“In the short term, it may be wise for some charities to use recent regulatory easements to suspend pension contributions for three months to conserve cash."
The firm highlighted easements introduced by the regulator earlier this year as a potential option for charities who might be struggling, such as flexibilities to defer pension deficit contributions.
However, the firm highlighted that this can only provide short-term respite and should not be considered a "free lunch", as the contributions will ultimately still need to be paid, adding that a longer-term sustainable funding plan is needed.
Smith continued: "TPR’s new funding regime will introduce ‘fast-track’ and ‘bespoke’ options for DB funding.
“The fast-track option ensures no regulatory intervention if minimum standards are met but could mean too big an increase in deficit contributions for some charities.
“For charities that are asset rich but cash poor, the bespoke route may be a better option.
“This enables investment returns rather than cash contributions to close the funding gap but needs to be underpinned by charging some of the charity’s assets to the pension scheme.”
Hymans Robertson predicted, however, that some charities will be unable to meet fast-track standards for the upcoming DB funding regime, due to the high level of cash contributions required.
As such, it has stressed the need to use “robust funding strategies” that will stand up to TPR scrutiny, outlining a number of elements that can support a funding plan.
Suggestions included the provision of security to the pension scheme, which 13 per cent of charities have already done, and the use of contingent funding plans.
It also pointed to DB master trusts and commercial consolidators, the latter of which would be particularly relevant to charities participating in last-man-standing multi-employer schemes, as potential longer-term solutions.
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