UK charities feel strain of DB scheme funding

Most charities are moving in line with their corporate counterparts, finding opportunities to reduce risk and manage DB costs.

However, they also face several challenges unique to the third sector, such as fundraising pressures.

It’s quite difficult for charities to raise income to pay for a pension deficit… if you’re paying money to the cats and dogs home, you want the money to go to the cats and dogs home

David Davison, Spence & Partners

Hymans Robertson research published earlier this month found that the average pension deficit is 18 per cent of unrestricted reserves.  

The consultancy highlights that the relative size of this deficit is much bigger for these organisations than for the average FTSE 350 corporate, where the DB deficit is only 1 per cent of market capitalisation.

“It’s clearly not completely like-for-like analysis, but 18 per cent of unrestricted reserves is far more material than 1 per cent of market cap,” says Alistair Russell-Smith, partner and head of corporate DB consulting at Hymans Robertson.

Donors uninterested in funding deficits

Charities can only use restricted reserves for specific purposes. For example, donations made for a particular project may not be used for anything else.

Unrestricted reserves, on the other hand, are the funds that a charity can spend on any of the organisation’s charitable purposes.

The charity trustees usually have complete discretion as to how they will use this money, such as channelling some into DB pension scheme funding.  

David Davison, a director and owner of Spence & Partners and a charity pensions expert, agrees that the comparison between charities and FTSE 350 companies is not like-for-like, but notes that it is fair, given that a charity’s “unrestricted reserves are effectively… there to provide extra costs, such as funding extra money to the pension scheme”.

Charities have a number of specific issues when it comes to DB pension funding. One is that “it’s quite difficult for charities to raise income to pay for a pension deficit… if you’re paying money to the cats and dogs home, you want the money to go to the cats and dogs home”, Mr Davison says.

He adds that most charities are in quite a delicate balancing position in terms of managing the income and the pension deficit over a very long period of time.

Nevertheless, “18 per cent of broadly unrestricted income is still, in the grand scheme of things, relatively small”, Mr Davison adds.

Costs must be stemmed

Using security and contingency planning is an important way in which charities can address their DB burden, says Mr Russell-Smith.  

There are also a number of ways to reduce costs, such as transferring to a DB master trust.

“Some charities do have reasonably well-funded schemes; they’ve taken off some investment risk and the priority then becomes: ‘We just need to run this off as efficiently as we can and reduce the running costs as much as we can’, and transferring to a master trust can be a very effective way of doing that,” Mr Russell-Smith says.