Increased pension deficits are putting additional strain on many charities already financially struggling in the midst of Covid-19, latest research by Hymans Robertson finds.
The consultant's annual report on defined benefit (DB) pension funding in the charitable sector looked at the largest 40 charities in England and Wales and found that three quarters of those surveyed had a deficit.
The research said the charities - which have a combined £42bn of reserves and £13bn of annual income, and support aggregate DB liabilities totalling £9bn - had an average funding level of 92% but found that, while ten charities had a surplus, 12 had funding levels of less than 80%.
In addition, it found five of the charities it analysed had deficits that were at least 50% of their unrestricted reserves, with one having a deficit that was over 100%.
It also found that two charities paid contributions in excess of 20% of their net unrestricted income.
The DB pension position of the UK's largest charities
Source: Hymans Robertson
Commenting on the pressure on charity schemes, Hymans Robertson head of corporate DB Alistair Russell-Smith explained: "The Covid-19 pandemic has placed many charities under significant financial strain with fundraising and retail income particularly badly hit and with a need to conserve cash. In many cases there is additional concern as DB pension deficits have also increased. On top of this, there is extra worry for pension schemes in the sector as forthcoming regulatory changes are putting pressure on charities to pay off pension deficits quicker.
"A delicate balancing act is needed between ensuring the sustainability of the charities and funding higher pension deficits. In the short term it may be wise for some charities to use recent regulatory easements to suspend pension contributions for three months to conserve cash. However, this isn't a free lunch and longer-term sustainable funding plans are needed for their DB schemes."
He added: "The Pension Regulator's new funding regime will introduce ‘fast track' and ‘bespoke' options for DB funding. The fast track option ensures no regulatory intervention if minimum standards are met but could mean too big an increase in deficit contributions for some charities. For charities that are asset rich but cash poor, the bespoke route may be a better option. This enables investment returns rather than cash contributions to close the funding gap but needs to be underpinned by charging some of the charity's assets to the pension scheme."
To read the research in full, visit: bit.ly/3dLYuMN
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