Its report: Defined Benefit pension funding in the charitable sector shows that at the same time, there’s been a 7% rise in average funding level of the DB schemes themselves, driven by positive return on pension scheme assets. While the sector continues to face challenges from rising inflation and a cost-of-living crisis, Charities need to consider how best to fund their pension schemes and take opportunities to reduce risks as they arise.
The annual research, from the leading pensions and financial services firm, assesses the charities’ DB pensions exposures by looking at reserve levels, income, and DB pension contributions. It highlights that charity income has fallen slightly from last year despite underlying income from fundraising and charitable activities rising. The analysis shows, this has been offset by a fall in restricted income, such as Covid-19 relief funding.
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: Charities have seen an improving funding position over the last year driven primarily by market conditions. Although some DB Schemes may have faced some challenges because of the market volatility at the end of 2022, many charities entered 2023 a step closer to being able to buy-out their DB pension scheme with an insurer.
“We expect 2023 is going 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.
“Another challenge for 2022/23 has been high inflation. This has hit some charities hard in terms of wage inflation as well as putting pressure on income. At the same time, pension scheme trustees may be seeking support from their charity sponsors to give pension scheme members discretionary pension increases to help their pensions keep pace with inflation. Charities should consider and agree their approach to these requests.
“For the 40% of charity pension schemes that remain open to accrual of benefits, rising gilt yields have more than offset the inflationary pressure on cost-of-benefits accruing. Since April 2021 there has been a c42% decrease in the cost of benefits accruing. This is a potential cost pressure release so charities should ensure their pension scheme trustees have factored this into the wider funding plan of the scheme.
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.”
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