Not-for-profit sector schemes should consider more specialist approach

It is fair to say that some industries have benefited greatly from the UK’s lockdown and subsequent social distancing, while others have been devastated. A number of not-for-profits fall into the latter category, suffering severe falls in funding and grave uncertainty. 

For the pension schemes of these various organisations, the effects have been profound and worrying. The pension schemes of not-for-profit organisations already share a number of common characteristics that mark them out as different, which means they could benefit greatly from a specialised approach. Covid-19 has only reinforced this distinction.

Not-for-profit sector pension schemes are around 15 per cent more likely to be open to new entrants than the average UK pension scheme

While every not-for-profit pension scheme is different, there are several common factors which mean that their requirements differ from other schemes. For instance, they tend to be smaller and have fewer resources at their disposal.

Buck’s research found that roughly 80 per cent of not-for-profit sector pension schemes are smaller in size than the average UK scheme, and with the funding drops caused by Covid-19, this disparity in resources could widen further.

Not-for-profit organisations often benefit from a healthy balance sheet. However, problems can arise if future contributions have to increase, as the free cash flow of not-for-profits cannot necessarily be increased significantly year on year.

These distinct circumstances present unique challenges and do not fit naturally into the Pensions Regulator’s usual mould, meaning an expert approach is required.

Not-for-profit pension schemes are also distinct when it comes to their make-up and aims. For example, such schemes are around 15 per cent more likely to be open to new entrants than the average UK pension scheme. They also tend to provide more valuable benefits — for example, lower retirement ages, higher pension increases — than average. 

Covid-19 worsens situation

The biggest recent change for the pension schemes of not-for-profit organisations, though, is the emergence of Covid-19 and the existential threat it poses. Necessary protocols, such as lockdown and social distancing, combined with a recession and an increasingly rocky economic outlook have already begun to affect the sector.

Recent data from the Charity Finance Group found that most charities (58 per cent) had to cut back services as the virus hit. The CFG has recorded 5,400 job losses in the charity sector already, and has predicted that the crisis could cost the sector 60,000 jobs.

The crisis has also hit funding and there is now a £10bn charity funding gap due to the economic effects of Covid-19.

Universities have also been hit hard and are facing uncertainty over any return to ‘normal’ teaching. This comes at a time when the latest figures from the Universities Superannuation Scheme have found that, in July 2020, the defined benefit pension deficit of the schemes measured was £12.9bn.

Across the board, the future looks shaky for many organisations and their pension schemes. Even pre-crisis it was clear that not-for-profit pension schemes often had particular requirements and sensitivities, which benefited from a specialised approach. The pandemic has made this even more apparent.

What pension schemes should look for

There are several things trustees can do to address these concerns, and strategy should be set in response to the specific needs of the not-for-profit sector.

For example, leveraging value from the sponsor’s balance sheet through the use of contingent assets can assist with Pension Protection Fund levies and the scheme funding strategy, via less prudent assumptions.

Recovery plans for not-for-profit schemes are often longer than average, and the use of contingent assets will help in getting acceptance from the regulator of lower contributions for a longer period. 

Managing the scheme’s investments through appropriate hedging strategies and monitoring cash flow needs can help avoid ill-timed disinvestments. Investment platforms and the use of specialist covenant advisers can also assist with minimising external costs.

Many smaller not-for-profit pension schemes have also not looked to obtain a scheme-specific membership postcode mortality analysis. However, Buck’s research found that commissioning such an analysis can improve the funding position of similar schemes by around 5 per cent or more.

Many not-for-profit sector schemes could be overstating assumed life expectancy, and therefore liabilities, by simply relying on standard mortality tables.

As guidance from TPR continues to evolve, the impact on not-for-profit pension schemes can be unclear, so it is important to have access to experienced advisers who are regularly in touch with the regulator and the PPF.

Whatever the funding position of the scheme, trustees in this sector should take the pandemic as an opportunity to reassess their needs.

Vishal Makkar is head of retirement consulting at Buck