The combined reserves of the largest 40 charities in England & Wales that sponsor DB pensions schemes fell to £39.5bn in 2022 from £46bn in 2021. As the economic uncertainty continues this fall makes it more difficult for charities to fund their pensions deficits, according to analysis by Hymans Robertson. In the face of this fall, and as the sector faces potential difficulties with rising inflation and an economic downturn, charities need to consider how best to fund their pension schemes.

The annual research, from the leading pensions and financial services firm: Defined Benefit pension funding in the charitable sector, assesses the charities’ DB pensions exposures by looking at reserve levels, income and DB pension contributions. Despite a fall in reserves the analysis found that charities’ aggregate DB liabilities had not fallen and instead, remained at approximately £9.5bn this year, as they did in 2021. The analysis highlights several reasons for the uncertainty faced by the charities: largely the Covid-19 pandemic in 2021 and now the Ukraine-Russia war in 2022 and the cost-of-living crisis are all resulting in lower income levels.

Commenting on how charities can best manage their DB pensions schemes in the face of recent challenges Heather Allingham, Actuary & Head of Pensions Consulting for Charities at Hymans Robertson says:

“When combined, the problems around income dropping, the fall in reserves and the lack of movement in liabilities puts charities’ pensions schemes in a challenging position. Ongoing communication on a few key things would help manage future pressures and maintain the delicate balance of a good level of charitable support and the ability to fund pension deficits.

“First, starting an open dialogue about immediate challenges as well as longer-term risks will help charities and pension scheme trustees to build a shared understanding of the challenges to income, reserves and therefore the implication on covenant ratings and available cash. Conversations about covenant leakage should also be included here, and although this is less of an issue for charities than for corporates, it will help to ensure the pensions scheme is treated equitably alongside other stakeholders.

“Additionally, looking at ways to increase scheme security, such as giving the pension scheme a charge over a charity asset or introducing a contingent contribution structure to support more investment risk or lower cash contributions, is one way to manage during this time.

“Considerations around Covid-19 are also still very important for schemes aiming to understand the rationale for their longevity assumptions. Charities should work with their pension scheme trustees to be sure the pandemic impact has been considered. Also, factoring in the one-off costs associated with preparing for Guaranteed Minimum Pensions (GMP) equalisation is also important – it could be one of the largest expenses schemes have faced in many years.

“Despite the current difficulties facing the sector, there are some things, like inflation, that may not have as detrimental an impact on some charities’ pensions schemes as others. High inflation could feel like bad news, however pension increases, whether RPI or CPI-linked, are usually capped at 5% or 2.5% on a year-on-year basis. So, schemes that have hedged against uncapped RPI, could see a beneficial impact on their funding positions.”