Increasing pension deficits are placing further financial strain on charities amid a funding crisis caused by Covid-19, new figures have revealed.

According to Hymans Robertson's annual Charity Benchmarking Report, which looked at the largest 40 charities in England and Wales, three quarters of charities have a defined benefit (DB) pension scheme in deficit.

The average deficit for the pension schemes surveyed by the consultancy firm was around 19% of net unrestricted income, with one charity reporting a deficit that exceeded their unrestricted income.

Upcoming regulatory changes, such as the new funding regime – which will introduce 'fast track' and 'bespoke' options for DB funding – are expected to place even more pressure on charities to pay of their pension deficits quickly, the firm said.

The warnings come at a difficult time for charities, as many seek to recover huge losses caused by cancelled fundraising events and shop closures. The sector is estimated to lose around £4.6bn over the course of UK lockdown.

According to the benchmarking report, the average DB scheme has funding levels of around 92%, but just a quarter (25%) of charities reported a pension surplus.

Meanwhile, the average pension contribution was just 4% of unrestricted net income, with only two charities paying contributions in excess of 20% of their net unrestricted income.

The firm highlighted that whilst the majority (60%) have closed their DB scheme to future accrual, market volatility stemming from Covid-19 had seen an increase in many scheme deficits.

“The Covid-19 pandemic has placed many charities under significant financial strain with fundraising and retail income particularly badly hit and with a need to conserve cash," Hymans Robertson head of corporate DB, Alistair Russell-Smith, said.

“A delicate balancing act is needed between ensuring the sustainability of the charities and funding higher pension deficits.

“In the short term, it may be wise for some charities to use recent regulatory easements to suspend pension contributions for three months to conserve cash."

Can the new funding regime rescue charities?

Easements introduced by the regulator earlier this year will provide some help for charities who might be struggling, such as flexibilities to defer pension deficit contributions.

However, Hymans Robertson stressed this can only provide short-term respite and should not be considered a "free lunch", as the contributions will ultimately still need to be paid, adding that a longer-term sustainable funding plan is needed.

As part of TPR's new funding regime, the 'fast-track' option ensures no regulatory intervention if minimum standards are met, but could instead mean charities would need to increase deficit contributions beyond their means.

“For charities that are asset rich but cash poor, the bespoke route may be a better option," Smith said.

“This enables investment returns rather than cash contributions to close the funding gap but needs to be underpinned by charging some of the charity’s assets to the pension scheme.”

The firm warned charities must use "robust funding strategies" that will stand up to scrutiny from the regulator, outlining a number of elements that can support a funding plan.

Suggestions included the provision of security to the pension scheme, which 13 per cent of charities have already done, and the use of contingent funding plans.

It also pointed to DB master trusts and commercial consolidators, the latter of which would be particularly relevant to charities participating in last-man-standing multi-employer schemes, as potential longer-term solutions.

As reported in Charity Times' sister title, >PensionsAge.

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