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UK charities rushing to shut costly DB schemes

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Charities have been rushing to close their defined benefit (DB) pension schemes to future accruals, with 58% of the largest charities now having done so, according to Hymans Robertson’s 2018 Charity Benchmarking Report.

The UK consultancy analysed the DB pension exposures of the largest 40 charities by income in England and Wales. The sample included the Wellcome Trust, Church Commissioners for England, the British Heart Foundation and Oxfam.

Alistair Russell-Smith, head of corporate DB at Hymans Robertson and author of the report, told IPE: “Typically, the pension scheme is a bigger issue for charities than companies in, say, the FTSE 350.

“Around 85% of those companies can pay off their scheme deficit with six months of earnings, but the pension scheme tends to be a bigger burden than this for charities.”

He said charities were facing big financial challenges, with contracts being run on ever tighter margins and fundraising under increasing pressure from new data protection rules.

Charity portfolios had an average allocation to growth assets of 53%, according to the report.

Russell-Smith said: “Some charities have been slower to de-risk than in the private sector, so have been hit hard by falls in yields over the past few years. This has made pension fund deficits in the sector more volatile.”

He added: “It is better to take a moderate amount of investment risk than to shoot the lights out. Doing this in conjunction with hedging inflation and interest rate risks stabilises the pension position and reduces the chance of having to pay higher pension fund contributions further down the line.”

The survey also found that the average charity paid around 3% of its net unrestricted income into its pension scheme. Russell-Smith said this percentage was not likely to fall.

“But it does not have to go up either,” he continued. “It looks small, but charities understandably want to use their resources to fund their charitable activities. Those with local government contracts also need to spend money on servicing those contracts.”

He said the most important priority was to maintain the security of regular deficit contributions, bearing in mind that charities could work to a slightly longer recovery plan than in the private sector.

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