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Charities should act now to avoid being overwhelmed by pension costs

Charities are being urged to be proactive on pensions as new regulation edges closer.

Charities are being urged to act soon to avoid the potential pitfalls of new pensions rules.

The new regulations, which are expected to come into force in 2022, will significantly change how charities and other employers fund their defined benefit pension schemes.

The changes could mean that charities have less time to deal with shortfalls in their pension scheme and will have to increase annual contributions.

Under the new rules, there will be two approaches to funding pensions. A standardised and prescriptive ‘fast track’ approach which could impose tough funding targets, or a more complex ‘bespoke’ approach where charities and other employers will need to spend time and money justifying why they need to be treated differently.

The rules are still in draft and are currently built around the circumstances of for-profit employers with little focus given to the issues facing the not-for-profit sector. The Pensions Regulator (TPR) is expected to issue its second consultation on the new rules later this year, which will provide a final opportunity for charities to feed back their views and influence the regulation.

A session at CFG's Annual Conference in October will be dedicated to discussing this issue and interested parties are encouraged to attend by booking here.

Roberta Fusco, Director of Policy and Communications at CFG explains: “We welcomed the opportunity to consult with our charity members and work with the experts at LCP to take a detailed look at the proposed funding code revisions in light of the charity context.

“Whilst welcoming reform, we are keen as ever to ensure that charities can fully meet their obligations to all stakeholders and that the charity context is reflected in any new code. Helpful discussions with TPR have been followed by provision of a detailed paper, addressing issues from a charity angle. We look forward to engaging further as the consultation progresses.”

Ed Symes who is a partner at LCP said: “We believe charities will no doubt welcome the principle of the new rules which is to improve the security of members’ benefits. However, it is important to recognise that charities are different to for-profit employers and may need more flexibility when it comes to funding their pension schemes. For example, pushing too hard on contributions could have a negative impact on the security of the scheme if it puts off donors from supporting the charity.”

“The current rules have an in-built flexibility which recognises the special situation of not-for-profit employers and it’s vital that this is not lost in the new regime.”

He also said: “We hope TPR’s second consultation will be more charity-aware because of the work that we have done with CFG, but I would encourage charities to respond to the second consultation as it could have a big impact on their finances if they have a defined benefit pension scheme”.

Charity Finance Group Annual Conference 2021

CFG’s Annual Conference (11-14 October 2021) is a four-day, online conference for charity finance professionals and charity leaders. This year’s conference theme is ‘Leading the Way: Effective, Inclusive, Resilient’. This year’s conference will include a session on what charities can do to influence the new pension rules, and actions they can take to prepare for its arrival and set a resilient pensions strategy. The session will include guest speaker Stuart Fox from charity RNIB and former pensions minister Steve Webb who is currently a partner at LCP.

The conference is open to all charities and they can book here.

About Charity Finance Group

Charity Finance Group (CFG) is the charity that inspires a financially confident, dynamic and trustworthy charity sector. We do this by championing best practice, nurturing leadership and influencing policy makers.

About Lane Clark and Peacock (LCP)

LCP is a pensions consultancy that support charities, other employers and pension scheme trustees manage the cost and risk associated with their pension schemes, with the ultimate aim of ensuring that benefits promised to members are paid in full.

 

Notes to editors:

  1. A defined benefit pension scheme provides an employee with a pension at retirement. The pension amount is calculated based on the members’ salary and length of service. These schemes are run by pension trustees whose main objective is to act in the best interests of the schemes’ members i.e. current and former employees. The charity/employer of the scheme is responsible for paying off any shortfall that arises.
  2. The Pensions Regulator is the regulator of work-based pension schemes in the UK.
  3. Current pensions regulation requires charities and pension trustees to formally review their defined benefit schemes every three years to check if there are enough assets to cover all pension payments expected to be made to members over their lifetimes (the “pension liabilities”). The Pensions Regulator requires the assumptions used to determine the pension liabilities, such as how long members may live, to be set cautiously. The assumptions must be agreed between the charity/employer and pension trustees.

If the pension liabilities are higher than the assets, then a pensions shortfall exists. The charity/employer then need to agree with the pension trustees a payment plan (usually cash) to close this gap. The shorter the time to pay, the higher each years’ cash payment.

  1. Under the current regulatory system, the average payment plan was around 7 years for a for-profit employer but around 9 years for a not-for-profit employer. This is based on information provided by The Pensions Regulator under the Freedom of Information Act 2000 which covers UK defined benefit pension schemes within TPR’s data tranches 11, 12 and 13.
  2. TPR’s first consultation on the new rules can be found here: DB funding code consultation | The Pensions Regulator

 

Media contacts

Emma Abbott, Communications Manager at Charity Finance Group: emma.abbott@cfg.org.uk

Roberta Fusco, Director of Policy and Communications at Charity Finance Group: roberta.fusco@cfg.org.uk

Ed Symes, Partner at Lane Clark and Peacock LLP: edward.symes@lcp.uk.com

 

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