Consultancy Hymans Robertson is calling on the defined benefit (DB) pension schemes of charities to avoid funding issues, as the combined reserves of the largest 40 charities in England and Wales that sponsor DB funds fell to £39.5bn (€45bn) in 2022 from £46bn in 2021.

As the economic uncertainty continues this fall makes it more difficult for charities to fund their pensions deficits, according to analysis by Hymans. In the face of this funds drop, and as the sector faces potential difficulties with rising inflation and an economic downturn, charities need to consider how best to fund their pension schemes, the consultancy warned.

The annual research – Defined Benefit pension funding in the charitable sector – assesses the charities’ DB pensions exposures by looking at reserve levels, income and DB pension contributions.

Despite a fall in reserves the analysis found that charities’ aggregate DB liabilities had not fallen and instead, remained at approximately £9.5bn this year, as they did in 2021.

The analysis highlights several reasons for the uncertainty faced by the charities: largely the COVID-19 pandemic in 2021 and now the Ukraine-Russia war in 2022 and the cost-of-living crisis are all resulting in lower income levels.

Heather Allingham, actuary and head of pensions consulting for charities at Hymans Robertson, said: “When combined, the problems around income dropping, the fall in reserves and the lack of movement in liabilities puts charities’ pensions schemes in a challenging position. Ongoing communication on a few key things would help manage future pressures and maintain the delicate balance of a good level of charitable support and the ability to fund pension deficits.”

She said that starting an open dialogue about immediate challenges as well as longer-term risks would help charities and pension scheme trustees to build a shared understanding of the challenges to income, reserves and therefore the implication on covenant ratings and available cash.

”Conversations about covenant leakage should also be included here, and although this is less of an issue for charities than for corporates, it will help to ensure the pensions scheme is treated equitably alongside other stakeholders,” she noted.

Additionally, looking at ways to increase scheme security, such as giving the pension scheme a charge over a charity asset or introducing a contingent contribution structure to support more investment risk or lower cash contributions, is one way to manage during this time, Allingham said.

“Despite the current difficulties facing the sector, there are some things, like inflation, that may not have as detrimental an impact on some charities’ pensions schemes as others. High inflation could feel like bad news, however pension increases, whether RPI or CPI-linked, are usually capped at 5% or 2.5% on a year-on-year basis. So, schemes that have hedged against uncapped RPI, could see a beneficial impact on their funding positions,” she said.

The latest digital edition of IPE’s magazine is now available