Spence Charity DB Pensions Report: High levels of scheme funding expected to drive renewed focus on endgame planning

by Alistair Russell-Smith   •  
Press Release
  • The average funding level of charity schemes is 104% on an FRS102 basis and 83% on an insurance buy-out basis
  • Just over one in four (26%) charities are no longer paying deficit recovery contributions
  • Only 33% of charities with an accounting surplus (FRS102) are fully recognising it on their balance sheet
  • Annual pension scheme running costs average £450,000 per annum

New research from Spence & Partners (Spence), one of the leading providers of pensions advisory and data services to pensions schemes in the UK, reveals that Charity DB schemes have seen funding levels rise to 104% on an FRS102 basis and 83% on an insurance buy-out basis.

The research from the inaugural Spence Charity DB Pensions Benchmarking Report analyses the accounts of 50 charities in England & Wales with larger DB schemes and with year ends between 30 April 2022 to 31 July 2023. In aggregate, this covers £8.5bn of DB assets.

The study reveals that buy-out deficits now average only 21% of unrestricted charity reserves, as rising yields have shrunk DB schemes relative to charity balance sheets. For some charities, running on schemes to access a surplus may now be more viable, utilising initiatives being rolled out off the back of the government’s Mansion House reforms.

The research found that 26% of charities are no longer paying deficit recovery contributions, with this proportion expected to rise as more deficit recovery plans come to an end. With deficit contributions ceasing, focus for charities will shift to endgame planning and reducing running costs.

The range of viable endgame options is growing and should be reviewed in light of improved funding levels and new options coming to market. Insurance buy-out will now be in reach for some schemes. However, charities with smaller schemes should consider waiting for the public sector consolidator from the Pension Protection Fund (PPF) to come to market from 2026. 

Furthermore, charities with larger balance sheets that already manage their own investments should consider running on their DB scheme to access surplus assets in the scheme. The DWP is consulting on regulatory developments to make it easier for sponsors to access surplus assets in DB schemes, and charities don’t have to pay the 25% tax on pension scheme surplus refund, having not had corporation tax relief on the pension contributions. Spence has calculated that if the DB schemes in the research were run on for the next 10 years, they would generate surplus assets for the sponsoring charities equal to an average of 8% of a charity’s unrestricted annual income or 12% of their unrestricted reserves.

The analysis shows that annual running costs for charity DB schemes average £450,000 per year. Some of these costs could be reduced significantly by using the latest systems and a simplified governance model. Spence has estimated that running costs could be cut by 30% with these actions – generating an average saving of £135,000 per year.

Alistair Russell-Smith, Head of the Charity and Not-for-Profit Practice at Spence & Partners, comments: "Funding levels for DB schemes in the charity sector have improved dramatically in the last two years with rising yields. Many schemes are now fully funded on accounting and Technical Provisions bases.  Furthermore, higher yields have shrunk schemes, meaning charities are now better placed to support them. Charities should review their DB endgame plans.  Whilst insurance buy-out will still be right in many cases, charities with smaller schemes should consider waiting for a public sector consolidator to come to market, and charities with larger balance sheets should consider running on their DB schemes to generate value for the charity and pension scheme members.  After years of pain, cost and liability from DB schemes, charities could potentially start viewing their schemes as an asset rather than a liability.

“Our research also found that running costs for DB schemes can get very high if left unchecked, and average £450,000 a year. Whilst some of this is justified with data work such as the need to equalise GMPs, some of it can be removed by using the latest systems and a simplified governance model.”

Read and download the full Spence Charity DB Pension Report is available here.

Further reading

Is your DB scheme an asset rather than a liability?

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2024 Charity Defined Benefit Pensions Benchmarking Report

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Spring Budget 2024 – What does it mean for pensions?

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