On the go: Three-quarters of charities have defined benefit schemes in deficit, adding extra strain to a sector already hit hard by coronavirus, according to a new report by Hymans Robertson.
The report, which surveyed the 40 largest charities in England and Wales, found that while 60 per cent of schemes are closed to future accrual and the average funding level is at 92 per cent, the average deficit of surveyed schemes represents 15 per cent of unrestricted reserves and 19 per cent of annual net unrestricted income.
Additionally, it showed that one charity, the Church Commissioners for England, has a deficit exceeding its unrestricted reserves and its unrestricted income.
The report noted: “Charities taking a lower level of investment risk are exposed to less deficit volatility, and can arguably fund deficits over a longer period of time.”
Average allocation to growth assets stands at 50 per cent, with 22 of those charities that disclosed their asset allocation placed above that average.
"The speed and scale of the Covid-19 crisis has had a severe financial impact on many charities,” the report stated.
“Retail income has stopped, and fundraising income is down significantly. Income from running contracts seems to be holding up, but often the associated expenses have increased from the cost of managing the Covid-19 impact on the contract.”
It added: “Cash conservation is therefore crucial and, understandably, this means some charities are looking to defer pension contributions.”
However, those charities that do look to defer contributions are cautioned that they will need to be paid eventually, and that whatever short-term respite they might provide, “a clear case for the deferral therefore needs to be set out, and evidence of other cost saving measures being introduced at the same time is helpful”.
Commenting on the pressure on charity DB schemes, Alistair Russell-Smith, head of corporate DB at Hymans Robertson, said: “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.”
He said “a delicate balancing act” is needed, one which ensures the sustainability of the charity while funding larger deficits.
Charities should also prepare for the Pensions Regulator’s new funding regime, expected in 2021, which will introduce both “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,” Mr Russell-Smith said.
“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.”
