Charities urged to understand changes and get prepared for new funding regime – LCP
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LCP is urging charities with DB pension schemes to prepare for the new funding regime.
The new regime applies to scheme valuations effective after 22 September 2024. Any charity with a DB scheme will be impacted and should be proactive in shaping the future strategy for their scheme, particularly as inaction could lead to calls for higher pension contributions.
Under the new rules, charities will have to work closely with pension scheme trustees to set a formal funding and investment strategy. Pension scheme trustees are also legally required to consider the financial strength of the employer (its ‘covenant’), with special guidance on assessing a charity’s prospects.
The new regime introduces many new concepts that are not straightforward. According to LCP, charities taking a proactive approach can ensure the pension trustees reach well-informed conclusions at the outset and reflect the charity’s objectives in their initial decisions.
There are three key steps that charities should take to make sure they are ready for the changes:
- Find out more about the likely impact of the regime on the scheme – if you are fortunate to have a scheme in a strong funding position this will mitigate a lot of the impacts, but if not then it is best to know now.
- Take control of the areas where you have a role – the funding and investment strategy normally needs to be agreed between charity and pension trustees so you can lead the discussions and influence the direction. This will be critical to the level of contributions payable.
- Prepare for the additional information that the pension trustees will request about the covenant – both in terms of the additional work and how you position any responses, so you are clear with pension scheme trustees about what projects are critical to the charity’s purpose. Being proactive in this area is likely to save cost and time and could avoid undue increases in contributions.
The Regulator has done a good job in recognising that the business model of a charity is very different from a corporate, with helpful points made in its recently issued covenant guidance around where easements could be appropriate. We did have some concerns about how the need for deficits to be paid off as quickly as ‘reasonably affordable’ would be interpreted when it came to charities. However, the guidance recognises that charities are fundamentally different from corporates and helpfully sets out where flexibilities can be considered.
Jonathan Wolff LCP Partner
