A “worrying gap” between small and large charities in pension finances has been identified in a survey.
Pensions consultancy First Actuarial surveyed 300 UK charities of various sizes – including Oxfam, Barnardo’s and ActionAid – and concluded that smaller charities faced lower pension scheme funding levels and disproportionately high running costs.
It estimated that 51 charities had a funding surplus for their defined benefit (DB) pension schemes and that £400m could therefore collectively be released to be spent on charitable objectives.
However, smaller charities that responded were less likely to have a surplus and many were struggling to run and meet their ongoing pension expenses.
It found that charity pension schemes with less than £50m in assets had an overall deficit against a low-dependency liability measure of £400m.
Emily Brown, First Actuarial pensions expert, said: “The survey highlights the need for schemes in the charitable sector to choose whether to run on in a cost-effective way, or actively consider buy-out with an insurer.”
‘Serious problems’
Defined contribution (DC) schemes – a pension pot based on how much is paid in – have largely replaced DB schemes.
The survey found that charities are now spending about twice as much on DC arrangements as on DB schemes, with 3% of all charitable expenditure going on pensions.
First Actuarial identified “serious problems” despite funding level improvements after 2022.
Three in five charity DB schemes were unlikely to generate enough investment returns to meet their running costs, the survey found.
A quarter of charity‑run DB pension schemes were funded well enough to buy out their liabilities, compared with more than half of schemes across the wider UK market, the survey found.
This means that 50% of businesses have fully funded the DB schemes, but only 25% of charities do – the problem most acute among small voluntary organisations.
Brown said that First Actuarial felt that smaller charities were being overlooked by similar industry surveys, and that her company will now produce this survey annually.
The survey focused on charities that sponsor their own DB schemes: 211 out of 334 organisations surveyed.
New opportunities to settle costs
Richard Soldan, Lane Clark & Peacock pensions team head, said: “A number of the charities that we work with do continue to struggle with deficits in their defined benefit schemes.
“One of the things that we absolutely suggest charities do is set a clear strategy for managing their schemes.”
When asked what smaller charities could do to put themselves in a stronger position, Soldan said: “They need to assess the liabilities that they have come up with a realistic plan to manage their pension liabilities, recognising that costs can be significant.
“There are new opportunities out there that could help them settle their liabilities at lower cost than in the past.
“It's important that charities are aware of that, particularly, there are likely to be some opportunities soon to settle liabilities and get rid of pension risks at a lower cost than has been possible previously.”
