Easing the pension burden on charities, just slightly…

June 15, 2012 at 11:59

Having gone through one or more tough pension valuations in the last few years, many charities have put their schemes on a financially stronger footing by reducing benefits, higher contributions, long term recovery plans and the pledging of assets. Those facing a valuation in the last 12 months or in the near future could be forgiven for being disheartened for the deficit stubbornly refusing to reduce.

The primary cause is nothing to do with investments as most asset classes have delivered some impressive performance over the last few years. Instead it is the valuation of the liabilities, which are based on the yields payable on government gilts, historically used to derive the risk free value of pension liabilities. Yields have fallen dramatically over the last year leaving many pension schemes on the critical list.

The much anticipated statement from the Pension Regulator was hoped to be the medicine that many schemes needed. The statement acknowledges the issues faced by employers, even if many will feel it understates the full extent of the challenges faced by pension scheme sponsors: the deterioration in gilt yields is the primary driver and far outweighs any improvements in factors such as asset allocation or applying CPI instead of RPI.

The Regulator recognises paying more cash into the scheme is not always the answer and so is implicitly accepting that recovery periods may lengthen for valuations in the current environment. Those charities whose covenant is strong enough to support a long recovery period will take some reassurance from this. A strong covenant and support of the pension trustees are the minimum expected prerequisites to a long recovery period.

The traditional view has been that gilt yields will recover, but will they and if so by how much and when? The Regulator is clear that smoothing of gilt yields is not an option nor are using yields at an earlier date than the valuation date. Post valuation experience is acceptable, so cross your fingers and watch the movement in gilt yields for any signs of improvement. Describing ‘gilt yield reversion in the recovery plan assumptions’ as ‘by exception’ the Regulator does not rule out this option in recovery plans as long as contingency plans are in place should yields not recover as expected. Pushing at this small opening is something to be discussed with pension trustees and in time with the Regulator.

The issues facing charities are more acute than most: refinancing is not an option and there are no dividends to be redirected towards pension contributions, indeed reduced dividends are likely to reduce income for charities making the situation worse. Every pound paid to the pension scheme is a pound that is not going towards the charitable purpose and away from where the donor thinks his or her money is being spent.

Schemes may not be feeling any better but at least could be a little more comfortable as they make a long and painful recovery. Add in auto-enrolment creeping up on the horizon and it is clear that pensions will continue to dominate the role of charity finance professionals, even those who previously have been relieved not to have a defined benefit pension scheme.

Kevin Barnes Kevin Barnes is a CFG trustee and director of finance at Barnardo’s.

 

 

 

 

 

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