Charities are catching up with private sector employers as the number of defined benefit schemes closed to accrual jumped to 58 per cent at March 2017 from 43 per cent a year earlier, according to consultancy Hymans Robertson.
Charitable organisations still have some way to go in comparison with their counterparts in the private sector. Only 19 FTSE 100 companies still provide DB benefits to a “significant number of employees”, according to consultancy JLT Employee Benefits.
Experts have pinpointed the shock of triggering section 75 debt as a key reason for schemes remaining open.
The trigger of section 75 debt has been one factor as to why charities have not felt it in their interest financially to close those schemes
Andrew O'Brien, Charity Finance Group
Prior to April 2018, charities faced paying their entire buyout deficit just to cease accrual in a multi-employer scheme. New legislation allows DB sponsors to defer paying this debt, and could prompt a further spike in closures.
Charities should have a stronger covenant
Hymans Robertson research indicates that the average DB scheme funding level for the biggest 40 charities in England and Wales has dropped to 82 per cent from 86 per cent over the course of 2017-18.
Alistair Russell-Smith, head of corporate defined benefit at the consultancy, identified weakening charity finances as partly responsible for the decline in funding levels.
“Charities are in a slightly worse position this year than they were last year, so their ability to sort their pension schemes has come down a bit,” he said.
That worsening financial position is reflected in the increased level of the average deficit in charities' unrestricted reserves – the type of charity assets that can be used for contributions to the pension scheme. The deficit has grown to 22 per cent from 16 per cent.
The Pensions Regulator announced in its annual funding statement that smaller schemes can expect added scrutiny at their next triennial valuation. 35 per cent of charities in Hymans Robertson’s survey have less than £80m in assets.
Russell-Smith argued that charities are “arguably better placed” to support their DB schemes, owing in part to their reduced tax obligations and lack of dividends.
“The ability for a covenant leakage is not as bad,” he said. “I do wonder how that will be reflected when the regulator looks at funding packages with charities,” he added.
S75 has prevented closures
As of April 6 2018, the new employer debt regulations allow scheme trustees to consent to an employer deferring its s75 debt when the employer no longer has any active members.
David Davison, head of public sector, charities and not-for-profit at consultancy Spence & Partners, said he had not yet witnessed a policy statement on the new rules from charitable schemes.
There is “still no real clarity from lots of the organisations… in terms of how they’re actually going to apply that, because there’s still a lot of flexibility [and] a lot of control in the hands of the trustees” on how they intend to implement such an arrangement, he said.
Andrew O’Brien, director of policy and engagement at the Charity Finance Group, which champions best practice in charities, envisaged “a lot of interest” in deferred debt arrangements from charities.
“The trigger of section 75 debt has been one factor as to why charities have not felt it in their interest financially to close those schemes,” he said.
Buyouts are not a good use of donations
The Oxfam Pension Scheme, which is part of mastertrust TPT Retirement Solutions, closed to new entrants in 2003. It has undertaken a number of measures in order to tackle its deficit.
Its latest actuarial update in September 2017 indicated a funding position of 87 per cent, placing it above the average FRS 102 level of surveyed schemes.
A spokesperson disclosed that the scheme plans to pay its deficit off over eight years “by a mix of investment returns and employer deficit contributions”.
Attractiveness of deferred debt arrangement remains to be seen
Employers in multi-employer pension schemes will now be able to delay the requirement to pay an employer debt when they cease accrual in the scheme, but opinions are divided on how attractive this will be.
The scheme has raised its staff contributions to 7 per cent and increased the pensions age for its staff to 66.
It has also reduced pensions increases “in line with legal minima” and conducted a pension increase exchange “to save some further money and reduce risk”, according to the spokesperson. The charity opposes a risk transfer.
“Oxfam has not urged the trustees to consider any risk transfer exercise as we consider buy-ins and buyouts very expensive and not a good use of donor money.” the spokesperson said.
