The combined reserves of the largest 40 charities in England & Wales that sponsor defined benefit (DB) pension schemes rose to £49bn in 2022 from £40bn in 2021, analysis by Hymans Robertson has found.

The report, DB pension funding in the charitable sector, revealed that there has also been a 7 per cent rise in the average funding level of DB schemes themselves, thanks to positive returns on pension scheme assets.

However, the research showed that charity income has fallen slightly from last year, as a fall in restricted income, such as Covid-19 relief funding, offset an increase in the underlying income from fundraising and charitable activities.

In light of this, Hymans Robertson argued that while the sector continues to face challenges from rising inflation and a cost-of-living crisis, charities should consider how best to fund their pension schemes and take opportunities to reduce risks as they arise.

Hymans Robertson actuary and head of pensions consulting, Heather Allingham, pointed to the bulk annuity market in particular, noting that many charities will have entered 2023 "a step closer to being able to buy-out their DB pension scheme with an insurer".

“We expect 2023 is going to be busy for risk transfer and charities should engage with their pension scheme trustees to re-assess their end game plans for their schemes," she continued.

However, Allingham noted that high inflation has also been a challenge for 2022/23, which has hit some charities hard in terms of wage inflation as well as putting pressure on income.

"At the same time, pension scheme trustees may be seeking support from their charity sponsors to give pension scheme members discretionary pension increases to help their pensions keep pace with inflation," she continued. "Charities should consider and agree their approach to these requests.

“For the 40 per cent of charity pension schemes that remain open to accrual of benefits, rising gilt yields have more than offset the inflationary pressure on cost-of-benefits accruing. Since April 2021 there has been a c42 per cent decrease in the cost of benefits accruing.

"This is a potential cost pressure release so charities should ensure their pension scheme trustees have factored this into the wider funding plan of the scheme."

More broadly. Allingham emphasised the need for charities and their pension scheme trustees to prepare for the new funding code of practice with a particular focus on how to best measure the covenant strength of the charity, suggesting that charities might want to focus on their affordability levels and cashflow reliability period.

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