We have been assessing the pension deficits of the largest UK charities since 2012. When we prepared our last biennial update back in May 2020, we were amid the COVID-19 outbreak and were concerned about potential falls in future charitable incomes and rising pension deficits. With optimism that in the UK we may have now overcome the worst of COVID-19 - what is the current position and what challenges still lay ahead for charities when interacting with their pension schemes? Below we provide a quick overview of our latest research.
- In the two year period since May 2020, pension deficits of the largest charities (by income) have grown. We have not seen the large increases as a result of Covid-19 that we were previously concerned about.
- Falling discount rates, which were as low as 1.2% in December 2020 (down from an average of 2.6% two years ago), have resulted in an increase in pension accounting liabilities. The impact was partially offset by a fall in long-term inflation assumptions; however, global inflationary pressures are building.
- Charities’ pension scheme cash contributions are driven by their ongoing deficits, not their accounting deficits. More charities have closed their pension schemes to future benefit accrual in the last two years, reducing costs. There has been no material change in deficit repair contributions however, and reductions to charities’ unrestricted incomes indicate a fall in the affordability of pensions.
- Increased pension buyout deficits and lower unrestricted reserves suggest that charities are now further away from being able to transfer their liabilities to an insurance company. We do not see a buyout as a viable option for many charities in the near term.
- The Pensions Act 2021 introduces new criminal sanctions and notification obligations for charity trustees, who should think carefully about any event that potentially impacts the financial strength of the charity and consider taking advice.
- Proposals for a revision of the regulatory approach to scheme funding will put more pressure on charities’ finances. With higher funding targets and shorter recovery plans, this may lead to scrutiny of the adequacy of the level of reserves that are being maintained.
Read the full analysis of our latest research here (subscription to Charity Finance required).
To discuss this research in more detail or how your charity is managing its pension scheme, please contact James Day in our Pensions team.
Please fill out the following form to access the download.