UK charities are being called to act to avoid the potential pitfalls of new pensions rules, which are expected to come into force in 2022, that will significantly change how charities and other employers fund their defined benefit (DB) pension schemes.
According to consultancy LCP, the changes could mean that charities have less time to deal with shortfalls in their pension scheme and will have to increase annual contributions.
Under the new rules, there will be two approaches to funding pensions: a standardised and prescriptive ‘fast track’ approach that could impose tough funding targets, or a more complex ‘bespoke’ approach where charities and other employers will need to spend time and money justifying why they need to be treated differently.
Following a consultation period which ended earlier this year, The Pensions Regulator (TPR) drafted the rules which are currently built around the circumstances of for-profit employers with little focus given to the issues facing the not-for-profit sector.
The regulator is expected to issue its second consultation on the new rules later this year, which will provide a final opportunity for charities to feed back their views and influence the regulation.
The Charity Finance Group will host a session at its annual conference in October dedicated to discussing this issue.
Roberta Fusco, director of policy and communications at CFG, said: “We welcomed the opportunity to consult with our charity members and work with the experts at LCP to take a detailed look at the proposed funding code revisions in light of the charity context.
“Whilst welcoming reform, we are keen as ever to ensure that charities can fully meet their obligations to all stakeholders and that the charity context is reflected in any new code.”
Ed Symes, partner at LCP, said charities will welcome the principle of the new rules which is to improve the security of members’ benefits.
“However, it is important to recognise that charities are different to for-profit employers and may need more flexibility when it comes to funding their pension schemes. For example, pushing too hard on contributions could have a negative impact on the security of the scheme if it puts off donors from supporting the charity,” he said.
“The current rules have an in-built flexibility which recognises the special situation of not-for-profit employers and it’s vital that this is not lost in the new regime,” he added.
He expects TPR’s second consultation to be more charity-aware and encourage charities to respond to the second consultation as it could have a big impact on their finances if they have a DB pension fund.