Taking bespoke funding route could help charities reduce pension costs, report finds
Melanie May | 18 June 2021 | News
Charities could reduce their annual cash contribution to their DB pension schemes by between 35 and 65% if they pledge security to their pension scheme and choose a bespoke funding plan under the proposed new DB funding regime rather than adopting the alternative fast track option, according to analysis by Hymans Robertson.
In its annual report on DB pension funding in the charitable sector, the pensions and financial services consultancy found that charities could significantly reduce their pension cash contributions by pledging security to support a lower funding target or longer recovery plan.
The report also found that the proposed new TPR funding regime will see pension deficits for the largest 40 charities in England & Wales increase overall by a substantial £1bn to £3.5bn, as schemes are required to put in place long term funding targets.
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Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, explained:
“The new DB funding regime is coming into force in 2022/23 and charities have big decisions to make as a result. The funding position of pension schemes in the ‘not for profit’ sector is, on average, worse than other sectors in the UK and with the new regime these deficit figures are set to increase by an estimated £1bn for the largest 40 charities as their schemes put long term funding targets in place. Charities are, therefore, more exposed to increased cash requirements under the new funding regime than other sectors.
“For the first time, however, the proposed new funding
regime gives charities tangible value from providing security to their pension scheme because there is a direct link between the amount of security provided to the scheme and the subsequent reduction in cash contributions. This means that pledging security to pension schemes may be a way for some charities to navigate the new funding regime whilst keeping cash contributions at current or even lower levels.
He added:
“It has been a tough year for charities. Cash to fund the pension scheme is therefore scarce. However, some charities do have significant balance sheets and unencumbered assets, which can be used to support the pension scheme and reduce cash costs. For example, a charge over charity property or investments can support a lower funding target or longer recovery plan which reduces the cash requirement down to more affordable levels. Opting for a bespoke funding plan would allow charities to do this and we calculate it could enable them to reduce cash contributions by 35-65%. This approach allows investment returns to plug more of the funding gap as well as giving the pension scheme trustees the covenant visibility that they need under the new funding regime.
“In contrast the alternative Fast Track route would increase cash costs for many charities. While this route ensures no regulatory intervention, it comes with a real cash cost at a particularly unwelcome time for charities.”
About Melanie May
Melanie May is a journalist and copywriter specialising in writing both for and about the charity and marketing services sectors since 2001. She can be reached via thepurplepim.com.