Defined benefit pension deficits at the UK’s largest charities have fallen substantially, according to research by BDO, published in the April edition of Charity Finance magazine.
Figures taken from the latest accounts of the top 50 charities in the Charity Finance 100 Index by the pensions advisory team at BDO reveal an overall deficit of £96.1m for organisations with defined benefit (DB) scheme commitments.
This compares to £985.1m in April 2022, when the research was last conducted among the top 50 charities (though around a quarter of these organisations are not the same cohort).
Writing in the magazine, Ruth Bromley, associate director, pensions covenant advisory at BDO, said there was also a “massive” reduction in pension liabilities “due to increased bond yields following the Bank of England’s policy of increasing interest rates to combat inflation”.
Among the 36 charities that were included in the top 50 in both periods, this reduction was approximately 33%, from £8.4bn two years ago to £5.6bn in the current research.
The group of 36 paid £143.8m into their DB pension schemes according to their most recently available accounts, a reduction of £33.7m (18%) from the previous £175.5m.
Bromley adds: “For those with disclosed accounting funding positions, excluding Wellcome, the group of 36’s estimated insurance company buy-out deficits fell from £4.9bn to 'only' £1.3bn, or around 25% of their unrestricted reserves.
“If we go back to our analysis from four years ago the buy-out deficit was nearer 90% the total unrestricted reserves, again excluding Wellcome.”
A changing landscape
Bromley also points out that the rules around pensions are changing and that the new Pension Scheme Funding Code (applicable for valuations with an effective date from 23 September 2024) regime could have a significant impact on charities.
“Charities will be under increased scrutiny to provide financial forecasts to support any deficit recovery period and provide other information in addition to what schemes outside of the sector must provide,” Bromley says.
In addition, “charities with large unrestricted investment holdings may soon find that pension trustees request that deficits are closed over a shorter period or ‘as soon as is reasonably affordable’, using those unrestricted reserves”, she warns.
At the same time, under the new Scheme Funding Regulations, “pension trustees must now have a stated long term funding objective, which will require a journey plan to reach that objective, and the risk that can be taken in that journey plan depends on the employer covenant strength”.
Bromley concludes: “Therefore, despite the significant improvement in the funding of UK DB pension schemes, there will still be difficult conversations for some charities, particularly those that must adopt the new code from September 2024.”
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