Charities have been urged to engage with The Pensions Regulator (TPR) on its upcoming defined benefit (DB) funding code to address the “potential pitfalls” of the rules and avoid being “overwhelmed by pension costs”.

LCP stated that the new regulations, which are expected to come into force from 2022, will “significantly change” how employers, including charities, fund their DB pension schemes, and that this could require an increase in annual contributions.

It will introduce two approaches to DB funding, a fast track and a bespoke approach, where charities and other employers will need to spend time and money justifying why they need to be treated differently.

However, TPR is expected to issue a second consultation on the new rules later this year, with LCP therefore urging charities to respond to this with their views in order to influence regulation.

LCP partner, Ed Symes, commented: “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.

“We hope TPR’s second consultation will be more charity-aware because of the work that we have done with Charity Finance Group (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 DB pension scheme”.

CFG director of policy and communications, Roberta Fusco, added: “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.”

The comments also follow analysis from Hymans Robertson, which suggested that charities could reduce annual cash contributions to their DB pension schemes by between 35 and 65 per cent if they choose a bespoke funding plan under the new funding code.

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