Defined benefit (DB) pension schemes in the charitable sector have seen a “significant turnaround” in funding over the past five years, according to analysis from Hymans Robertson, which revealed a 20 per cent rise in the average funding level since 2019.

Hymans Robertson’s report showed that the combined reserves of the largest 40 charities in England & Wales that sponsor DB pensions schemes rose to £50bn in 2022, marking a £39bn increase since 2019.

The report showed that the funding level improvements were driven predominately by falling pension scheme liabilities, which fell from £9bn in 2019 to around £7bn.

This is at a time when charity income is also rising, now exceeding pre-Covid levels, with this year's aggregate charity income estimated at £15bn, up from £12.6bn in 2019.

Hymans Robertson pointed out that, as a result of these improvements, buyout of the pension schemes is now closer than ever before for many charities, with a 20 per cent improvement in funding potentially halving the expected time to buyout.

This means that charities have the opportunity to pass the pension scheme risk onto an insurer and off the charity balance sheet.

However, the firm acknowledged that the general rosier position all round could mean some charities may now be considering run-on of their schemes a more appealing option.

It also acknowledged that the aggregate figures do hide some more challenging situations for some charities where contributions to fund the DB scheme may still be a struggle and placing strains on charity finances.

Given this, Hymans Robertson actuary and head of pensions consulting, Heather Allingham, encouraged charities to engage with their pension scheme trustees to plan their end-game strategy and ensure the scheme is managed appropriately with that in mind.

"Although some DB Schemes may have faced some challenges because of the market volatility at the end of 2022, many charities are now seriously able to consider buyout of their DB pension scheme with an insurer," she stated.

“2024 continues to be busy for risk transfer and charities should engage with their pension scheme trustees to re-assess their end game plans for their schemes."

Allingham said that charities and their pension scheme trustees should also be preparing for the new funding code of practice with a particular focus on how to best measure the covenant strength of the charity.

"We would suggest that charities might want to focus on their affordability levels and cashflow reliability period," she added.

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