Is the proposed new funding regime for DB pensions fit for charities?

No, simply put. In fact across its 175 pages charities feature just once in the Pensions Regulator’s first consultation, and even then only to acknowledge that they are “atypical”.

Understandably the first consultation focused on corporates (in contrast to the word “charity” the word “dividend” is mentioned thirty times) but we believe that the second consultation should feature charities and not for profits much more heavily. If charities want to influence the content of that consultation, now is the time to act with the Pensions Regulator informally speaking to key stakeholders.

So why is the proposed funding regime not fit for charities?

The principle of the new regime - to improve the security of member benefits - is something all charities will support. Charities by their nature want to do the right thing and after all the members of their DB schemes will either currently or in the past have worked at the charity and been critical in delivering their services.

It is not the principle itself but how the principle is applied that is the issue. The first consultation states that the time period over which you can predict with any certainty the strength of an employer (or covenant visibility) is typically three to five years. In our view, this is at best a sweeping generalisation for the corporate sector but for the charity sector does not reflect the longevity of many of the larger charities who are those who tend to sponsor DB schemes. These charities have survived for decades navigating two World Wars, the Great Depression, the 2008 financial crisis and most recently the pandemic well beyond the three to five year time horizon.

The funding and investment approach of their pension schemes should reflect this and so regulation should allow them to take a “lower for longer” approach when it comes to pumping cash into their pension schemes. A short-term approach could even end up reducing member benefit security if significant funding upfront is required to meet the regulatory requirements and that then subsequently puts off donors from supporting the charity.

This is a particular issue with the proposed “Fast Track” approach where the proposal is to build in limited visibility on the covenant making it hard for DB schemes sponsored by charities to comply. Of course charities could follow the “Bespoke” route but this is still benchmarked against “Fast Track” and it also means additional compliance costs, which is money that could otherwise be spent on meeting charitable objectives.

To resolve this the Pensions Regulator should make sure the bespoke route avoids needless compliance costs for charities– what you might call “bespoke-lite”. This could give charities longer to de-risk their assets and longer to pay off deficits commensurate with the actual covenant shape. Charities will then still be required to tackle their pensions issues and the risks, but in a proportionate and appropriate way.

If you are interested in discussing this topic or other topics relating to charities and pensions then get in touch.