New pension rules could cost charities up to £3.5bn more, financial consultants warn

03 Sep 2021 News

Expected changes to regulation on funding defined benefits (DB) pension schemes will increase many charities’ pension costs, according to Hyman Robertson, a financial consultancy firm.

Writing in the September edition of Charity Finance, Heather Allingham, head of pensions consulting for charities, and Alistair Russell-Smith, head of corporate DB, say that the largest 40 charities in England and Wales (by income) support aggregate DB liabilities of around £9.5bn.

The introduction of long-term funding targets under the rules means that aggregate pension deficits at these charities could increase by a “substantial” £1bn to £3.5bn, they predict.

However, the pair also highlight ways that the burden can be minimised, especially for asset rich organisations.

New rules

The article explains that, under the new rules, when “a scheme is ‘significantly mature’ (within 15-20 years for most schemes) there is an expectation that schemes will have a low level of dependency on the employer and be invested with a high resilience to risk”.

This means that pension scheme trustees “must develop a plan to meet this long-term low dependency objective”.

“A scheme’s funding basis (known as technical provisions) must have an explicit link to the long-term objective, with a convergence evidenced in a journey plan,” it adds.

The Pensions Regulator (TPR) is allowing a degree of flexibility in how this is done, allowing two routes: fast track and bespoke.

Fast track option

“Adopting fast track involves complying with a set of minimum funding standards, which then ensures no regulatory intervention,” Allingham and Russell-Smith write. “This involves setting a long-term objective (LTO) to be fully funded on a basis of ‘gilts + 0.5% pa’ or stronger within 15-20 years, having cash recovery plans of no more than six years for stronger employers, and not exceeding prescribed levels of investment risk.”

It is this option that they predict could increase aggregate pension deficits at the largest charities by a substantial £1bn to £3.5bn.

Bespoke option

For those that cannot afford the fast track option, the bespoke route offers a less rigid approach.

“Under the bespoke approach, charities and their pension scheme trustees may have some tough conversations and competing demands to tackle, however dealing with these proactively could save the charity from a serious financial strain,” the article states.

“The bespoke option can also be used by charities that want to pledge security to the pension scheme to support a lower funding target or longer recovery plan than is permissible under fast track.”

More details on the options available and case studies on their possible impact are available in the September issue of Charity Finance.

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