CFG has responded to The Pensions Regulator (TPR) consultation on the draft Defined Benefit (DB) funding code of practice and regulatory approach on behalf of the charity sector.
Although the proposed changes will not affect every charity, for those with a closed DB pension scheme the code as currently drafted could have a significant impact.
A new ‘reasonably affordable’ requirement set out in the draft could mean charities needing to divert more of their funds to paying down pension schemes, rather than to beneficiaries.
A 2001 freedom of information request from The Pensions Regulator showed that the mean and median recovery plan lengths for not-for-profit sponsors was just under nine years.
If the current flexibility available for not-for-profits is reduced to the average length of recovery plans for for-profit organisations of six years, this would mean an increase in contributions by not-for-profits of 30-40%.
CFG has recommended that TPR tightens the code so that it is clear that the requirement for pension schemes to be funded at a reasonable level does not unduly impact on charities.
The newly proposed ‘reasonably affordable’ legal requirement, combined with the faster pace of funding, will make it harder for charities to determine what is an acceptable outcome in the new regime.
CFG has recommended that tailored guidance for charities is needed, so that the regulator's new code accounts for the nuances of charity finance.
Without this, pension scheme trustees may feel obliged to follow guidance which ultimately undermines their charitable objectives and purpose.
Richard Sagar, Head of Policy, CFG, explains:
"Since CFG’s first submission to the TPR several years ago, the regulator has included some specific guidance for not-for-profits, but we're of the opinion that this doesn't go far enough.
"For example, there is no mention of the specific concerns around the impact of charities paying more into their DB schemes would mean for donor perceptions. So we've recommend that there is explicit reference to concerns around donor/stakeholder perception in the funding code.
"Specifically, we would like more explanation on understanding the potential risk to charities, that increasing the level of scheme contributions to pensions could have an impact on donor perception, which in turn could reduce the willingness of donors to provide financial support to the charity. The unintended consequence could be a weakening of the charity’s financial position and a corresponding weakening of the covenant.
"We will continue to engage with TPR to ensure that the updated code works both for pension trustees, but also for charities."
Read CFG's response to TPR's consultation
Find out more about the consultation
CFG would like to thank those member charities and corporate partners who contributed to this consultation response.
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