Non-profit organisations could benefit from the government’s relaxation of rules around surpluses, says Spence & Partners.
UK charity defined benefit (DB) schemes have experienced significant improvements in funding levels in the past two years, in line with other DB schemes, Spence & Partners found.
The consultancy group reported that the average funding level for 50 charity schemes across England and Wales was 104% on an FRS102 accounting basis, and 83% on an insurance buyout basis.
This improvement in funding meant more than a quarter (26%) of charities were no longer paying deficit recovery contributions.
However, two thirds of charities with an accounting surplus in their scheme were not fully recognising this on their balance sheets, Spence & Partners said, implying that they could miss out on benefits should the government relax rules around surplus extraction.
“Charities with larger balance sheets that already manage their own investments could consider running on their DB scheme to access surplus assets in the scheme,” Spence & Partners said in a statement.
Charities already do not have to pay the 25% tax on surplus refunds as they do not receive corporation tax relief on contributions.
According to Spence & Partners, if charities can run their DB schemes on for another 10 years, they could generate surplus assets “equal to an average of 8% of a charity’s unrestricted annual income or 12% of their unrestricted reserves”.
Alistair Russell-Smith, head of the charity and not-for-profit practice at Spence & Partners, said: “Higher yields have shrunk schemes, meaning charities are now better placed to support them. Charities should review their DB endgame plans…
“After years of pain, cost and liability from DB schemes, charities could potentially start viewing their schemes as an asset rather than a liability.”
While buyout may be an option for some well-funded charity schemes, Russell-Smith said charities with small schemes should consider waiting for the creation of a public sector consolidator backed by the Pension Protection Fund (PPF).
Although this is still subject to consultation, under the current plan the PPF’s consolidator vehicle is expected to come to market from 2026 and target small schemes, meaning charities may find this to be a more affordable option.
The research analysed the accounts of 50 charities in England and Wales with DB schemes, covering £8.5bn of assets.
