UK charities are facing pension deficits proportionately higher than listed company schemes, according to a report from consultancy firm Hymans Robertson report.
The report, titled ‘DB pension funding in the charitable sector’, found that across 40 of the largest charities in England and Wales, the average pension deficit equalled 18% of their unrestricted reserves – funds freely available to spend on a charity’s purposes, and which therefore indicate a charity’s ability to support its defined benefit (DB) obligations.
In contrast, the DB scheme deficit for the average FTSE 350 company was only 1% of its market capitalisation, the consultancy said.
Alistair Russell-Smith, head of corporate DB consulting at Hymans Robertson, said: “Charities are facing the double whammy of fundraising pressures hitting income, at the same time as The Pensions Regulator [TPR] wants them to put more cash into their pension schemes.”
In its report, the consultancy warned that TPR was expected to introduce stricter funding requirements for DB schemes, which many charities could feel was “onerous”. The company also expressed concern that such a regime could force some schemes to take more investment risk.
However, Russell-Smith said charities should seek to make use of their advantages over companies.
“Charities tend to have far less covenant leakage than corporates – they don’t pay dividends, often have no debt, and there tends to be a strong focus on preserving reserves,” he said. “So pension scheme trustees may have more confidence in the long-term covenant support than with a corporate.”
He added that some charities had unencumbered assets such as property on their balance sheet, which could be used to provide additional covenant support to the pension scheme.
“The long-term covenant, bolstered where possible with security over charity assets, could support a longer recovery period for the pension scheme,” he said. “All this helps set a sustainable funding and investment strategy for the pension scheme with appropriate contingency plans in place.
“As The Pensions Regulator becomes tougher and intervenes more in pension funding in the sector, I expect this to become an increasingly important feature in a charity’s toolkit.”
Russell-Smith also highlighted consolidation as an option for charity DB schemes. One option was “sectionalised DB master trusts”, which he said could reduce scheme running costs by as much as 50% while removing the ‘last man standing’ risk inherent in some multi-employer schemes.
TPT Retirement Solutions is one such offering, and already runs a number of charities’ DB funds.
Russell-Smith added: “Commercial consolidators can provide a clean break to employers from their DB pension scheme at a lower cost than buy-out, and especially for charities in multi-employer schemes to exit cost-effectively, while improving benefit security for their members.”
Pension funding levels of UK charities
For some UK charities, maintaining DB schemes has proven a near-impossible challenge, writes Nick Reeve.
In March this year, a small development charity in Northern Ireland shut down, citing the unaffordable cost of its DB scheme, and IPE research has shown that larger charities also face large shortfalls.
More than half of 44 charity DB pension funds analysed by IPE were in deficit according to their latest annual reports. Of the sample, 29 funds recorded a shortfall, and in some cases the nominal deficit was a significant proportion of the charity’s annual income.
Hymans Robertson’s report showed that the average charity DB fund deficit was equal to 24% of annual unrestricted income, but this figure was much higher for some individual charity schemes.
Animal charity the PDSA’s £49.7m pension fund deficit, recorded at the end of December 2017, was more than 48% of its total 2017 income, while Blind Veterans UK reported a DB pension deficit of £17.6m at the end of March last year, 59% of its annual income.
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