Proposed regulatory changes to defined benefit (DB) pension funding could have a “detrimental” impact on charities, the Charity Finance Group (CFG) has warned.
In its response to the Pensions Regulator’s consultation on the DB funding code of practice, CFG said that the proposed changes are too restrictive and do not take into account the nuances of charities’ finances.
It criticised a proposed “reasonably affordable” requirement, which it said could mean that charities might need to divert more of their funds from beneficiaries to pay down their DB pension schemes.
CFG said the changes “won’t work for charities” and urged the Pensions Regulator to review its code so that the rules do not “unduly” affect the sector.
Proposed guidelines are ‘too restrictive’
The Pensions Regulator is proposing to introduce a concept of “reasonable affordability” whereby trustees must recover funding deficits as quickly as reasonably affordable.
It said that the principle “allows room for trustees and employers to agree recovery plans that take full account of the sponsor’s needs to invest in its business and use its available resources for appropriate means”.
However, CFG said that this “will make it harder for charities to determine what is an acceptable outcome in the new regime”.
“Charity finances are complex and charities may face considerable restrictions on the use of certain funds which means those funds are not available to be used for the pension scheme,” it said.
“Charities have duties to consider holding certain balances as reserves, to manage the financial risks they face, including risks associated with the pension scheme.”
New regime ‘lacks flexibility’
CFG said it is concerned by the “inflexibility” of the new regime, adding that “at a point of significant maturity, it requires very low-risk investments even when the overall financial position of the charity is strong”.
“We believe greater flexibility should be available to charities which can demonstrate a strong long-term covenant. Depending on the sources of its income, a charity may have more or less flexibility on how to deploy that income. In turn, what is ‘reasonably affordable’ to put in to pension schemes will vary.”
As part of the changes to its regulatory approach, the Pensions Regulator has set a limit of six years for recovery plans for not-for-profit organisations with open schemes.
CFG argued that this would result in an increase in contributions by not-for-profits of 30-40% as the average recovery plan lengths tend to be around nine years.
“Increasing contributions by this amount would likely have a large impact on donor perceptions and could therefore weaken the financial position of the charity and therefore weaken the covenant,” it said.
“The newly proposed ‘reasonably affordable’ legal requirement combined with the faster pace of funding will make it harder for charities to determine what is an acceptable outcome in the new regime.”
Guidance does not ‘go far enough’
Richard Sagar, head of policy at CFG, said that the Pensions Regulator has included “some guidance” for the sector since the group submitted its first response a few years ago but that it does not “go far enough”.
“For example, there is no mention of the specific concerns around the impact of charities paying more into their DB schemes would mean for donor perceptions. So we’ve recommended that there is explicit reference to concerns around donor/stakeholder perception in the funding code,” he said.
“Specifically, we would like more explanation on understanding the potential risk to charities, that increasing the level of scheme contributions to pensions could have an impact on donor perception, which in turn could reduce the willingness of donors to provide financial support to the charity. The unintended consequence could be a weakening of the charity’s financial position and a corresponding weakening of the covenant.”
The Pensions Regulator said it expects the final code to come into effect on 1 October 2023.
Related articles
