U.K. charities face a 40% increase in aggregate pension fund deficits due to proposed amendments to defined benefit funding requirements.
Analysis by consultant Hymans Robertson found that a proposed new funding regime by the U.K. Pensions Regulator — which would require more prudent funding targets and quicker repayment of deficits, set to go into effect in 2022 or 2023 — would see deficits for the largest 40 charities in England and Wales increase by £1 billion, to £3.5 billion.
A report of the analysis said these charities have a combined £46 billion in reserves, £13 billion of annual income and support a total £9.5 billion in DB obligations.
As of March 31, 2020 — the latest available annual reports on which to focus analysis — the average funding level of charity DB plans was 94%, with 35% running a surplus. These DB funds had an average 45% allocation to growth assets.
However, Hymans' report said there is a way charities under financial strain from the COVID-19 pandemic can reduce annual cash contributions to DB funds. TPR's proposals include a "fast-track" option for adapting to any new funding regime — complying with a set of minimum funding standards set by TPR — or a "bespoke" or customized option. The customized option gives flexibility to charities, with the potential of using charity assets to enhance sponsoring employer support for the pension fund and setting a longer recovery plan, thereby reducing the annual cash contribution requirement, Hymans said.
By pledging such security to the fund and choosing a customized funding plan, charities could reduce contributions 35% to 65%, the report said.
The new funding regime would mean "charities have big decisions to make," Alistair Russell-Smith, head of corporate DB at the consultant, said in a news release accompanying the report. "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."
The potential changes come amid a particularly tough year for charities, which have had to face a difficult fundraising period and plummeting retail income due to COVID-19, the report added. At the same time, demands for charities' services have led to increased pressure on expenditure.
"Cash to fund the pension scheme is therefore scarce," Mr. Russell-Smith said. "However, some charities do have significant balance sheets and unencumbered assets, which can be used to support the pension scheme and reduce cash costs."
