New regulations impacting DB pension schemes will come into force later in the year. Ed Symes FIA, from Lane Clark & Peacock LLP, explains the changes and what charities can do about them.
On 22 September 2024 a new set of funding regulations will come into force that will impact all UK defined benefit (DB) pension schemes, other than the Local Government Pension Scheme (which some charities use).
Charities who sponsor a DB scheme or participate in a multi-employer DB scheme will need to take action to understand and mitigate any impact.
What is happening?
The new funding regulations make the requirements for funding a defined benefit pension scheme more stringent, so could require higher contributions. The two new key legal requirements are:
- There will need to be a clear plan to reach a well-funded position on a low-risk basis; and
- Contributions payable to fund any deficit must be the maximum “reasonably affordable” by the charity.
The latter requirement is likely to be challenging for charities as what is reasonably affordable is difficult to define. Whilst in the corporate sector the Pensions Regulator defines this relative to dividends to shareholders, there is no similar metric in the charity sector. One pound into the pension scheme is one pound less to charitable activity and the “reasonable” balance between the two is difficult to assess.
Is everything confirmed?
Not quite. The Pensions Regulator is due to issue its final funding “code of practice” that accompanies the regulations in June 2024 and we are also expecting some guidance on assessing an employer’s financial strength over the summer. The latter is likely to be of particular interest to charities given the reasonably affordable dynamic above.
Charities will need to consider how best to respond to requests by pension scheme trustees for financial information, to ensure their finances are viewed appropriately. If the pension trustees do not understand your finances properly, you could be hit with unnecessary contribution increases.
What should I do?
The exact impact is very finely balanced depending on a charity’s individual circumstances. You should get information on how well funded your pension scheme is as this will drive whether it is a major issue for you. You should look to explain your charity’s finances appropriately to the pension trustees.
On a positive note, a lot of schemes have seen material improvements in funding positions over the last 18-24 months owing to rising interest rates and good asset performance.
We have been working with a range of charities with schemes in such a position – many of them are actively looking to either insure their scheme or pay an exit debt so they can remove defined benefit pensions risks for good. In these cases the new funding regulations are less of an issue.
On the other hand, a number of charities have not benefited to the same extent and could be facing large contribution bills, particularly when the new regime comes into play. A lot of schemes in the sector have a 30 September 2024 or 31 December 2024 valuation (an assessment of the funding level). If that is you, you might be asked to pay more next year. If you are asked for more, it is possible to negotiate future contributions with the pension scheme trustees – so it will be important to engage with them and present a persuasive case.
Getting more information
We will be providing more information to CFG members as all the details are finalised, particularly during the summer.
If you are interested in having a pensions health check in the meantime, please reach out to Edward Symes or Richard Soldan who are pensions experts in the charities team at our corporate partners LCP.