The combined reserves of the largest 40 charities in England & Wales that sponsor defined benefit pensions schemes rose to £50bn in 2022, according to Hymans Roberson’s annual report on DB pension funding in the charitable sector.
The analysis also shows that there’s been a 20% rise in average funding level of the DB schemes since 2019 driven predominately by falling pension scheme liabilities. This is at a time when charity income is also rising, now exceeding pre-Covid levels.
The 2024 report assesses the charities’ DB pensions exposures by looking at reserve levels, income, and DB pension contributions. It shows that as a result of these increases, buy-out of the pension schemes is now closer than ever before for many charities. So, they now have the opportunity to pass the pension scheme risk onto an insurer and off the charity balance sheet.
“Charities have seen a significant turnaround in funding over the last 5 years, with a particular jump in funding level over the last year. Although some DB Schemes may have faced some challenges because of the market volatility at the end of 2022, many charities are now seriously able to consider buy-out of their DB pension scheme with an insurer,” said Heather Allingham, Actuary & Head of Pensions Consulting for Charities at Hymans Robertson.
“2024 continues to be busy for risk transfer and charities should engage with their pension scheme trustees to re-assess their end game plans for their schemes.
“Charity income is also on the up, hitting £15bn this year, up from £12.6bn in 2019. Although we expect most charity schemes will be targeting buy-out, this rosier financial picture may prompt some charities to consider if run-on is a viable option for them, particularly those charities with larger schemes. Charities should be engaging with their pension scheme trustees to plan their end-game strategy and ensure the scheme is managed appropriately with that in mind,” she added.
“Finally, charities and their pension scheme trustees should be preparing for the new funding code of practice with a particular focus on how to best measure the covenant strength of the charity. We would suggest that charities might want to focus on their affordability levels and cashflow reliability period.”
