UK charities are facing pension deficits equalling a fifth of their unrestricted assets according to Hymans Robertson’s report, DB pension funding in the charitable sector. The analysis by the leading pensions and risk consultancy found that across 40 of the largest charities in England and Wales the average FRS102 pension deficit equals 18% of their unrestricted reserves.

This relative size of the deficit is far bigger for these charities than for the average FTSE 350 company where the DB scheme deficit is only 1% of market capitalisation.

Alistair Russell-Smith, Partner and Head of Corporate DB consulting at Hymans Robertson comments on how charities should respond:

“Charities are facing the double whammy of fundraising pressures hitting income at the same time as The Pensions Regulator wants them to put more cash in to their pension schemes.

“However, there are still some bright spots on the horizon to help charities and their pension scheme trustees strike the right balance.  For example, charities tend to have far less covenant leakage than corporates.  They clearly don’t pay dividends, they often have no debt, and there tends to be a strong focus on preserving reserves.  All of this means pension scheme trustees may have more confidence in the long term covenant support than with a corporate.  Some charities also have unencumbered assets on their balance sheet like property, which can be used to provide additional covenant support to the pension scheme.  The long term covenant, bolstered where possible with security over charity assets, can support a longer recovery period for the pension scheme, freeing up cash for charitable purposes.  All of 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.

“Emerging pension consolidation solutions should also be considered by charities. For example, commercial consolidators can provide a clean break to employers from their DB pension scheme at a lower cost than buy-out, and in particular could be a good way for charities participating in multi-employer schemes to exit cost effectively at the same time as improving benefit security for their members.  Another pension consolidation option to consider is sectionalised DB Master Trusts, which can reduce scheme running costs by as much as 50% compared to running your own scheme, but crucially do not expose charities to the last man standing risk of traditional multi-employer schemes.”