Charity pension survey spotlights worrying gap between haves and have-nots
First Actuarial has carried out the biggest survey of pension scheme funding in the UK third sector. Spotlights a wide gap between large and small charities, the research shows that around seven-in-ten have less than £10 million in their defined benefit scheme, leaving them open to higher running costs and limited insurance options.
The biggest survey of pension scheme funding in the UK third sector – carried out by First Actuarial, a Gallagher company – takes in data and insight from 300 UK charities, covering the full spectrum of the sector; from the largest to some of the smallest. As it stands, charities are spending 7% of total staff costs, and 3% of total expenditure on pensions. But with public spending cuts and reductions in state aid impacting the third sector, finding ways to make savings there may be crucial to the functioning of many organisations in the years ahead.
At present, First Actuarial estimates that 70% of defined benefit pension schemes for the third sector are smaller than £50 million. Of the 300 surveyed, that includes around 50 between £10 million and £25 million, and 70 of less than £10 million.
Currently, this leaves seven-in-ten charities open to a number of issues – including disproportionately higher running costs. Many running costs for smaller schemes are fixed, and represent a larger percentage of assets for those charities. Meanwhile, insurer appetite is limited for this segment, meaning that even while competition has improved (five insurers offering coverage in 2020 to nine now), smaller schemes are at a greater financial risk, pushing up buy-out costs.
Emily Brown, scheme actuary at First Actuarial, commented, “Our survey, which is representative of the charitable sector as a whole, reveals a troubling picture of haves and have-nots. Smaller charities face lower pension scheme funding levels and disproportionately high running costs. The survey highlights the need for schemes in the charitable sector to choose whether to run on in a cost-effective way, or actively consider buy-out with an insurer.”
Generating returns
The Pension Schemes Bill 2025 offers an opportunity for smaller firms to try and cover these costs – as it includes a proposal to allow scheme trustees to release surplus assets. This can create a compelling argument across the industry for running-on a well-funded scheme, rather than undertaking a risk transfer transaction with an insurer, with the aim of generating additional funds to support charitable objectives.
According to the study, 51 charities currently have an LDFB surplus – that’s £400 million, which could be released to charities to help them meet their objectives. And if those schemes continue to run on, further funds could be released down the line – potentially up to £80 million per year across the charities in the dataset.
However, most do not even generate such returns. To remain viable into the long term, schemes need to generate sufficient asset outperformance to meet ongoing expenses, and smaller schemes where expenses are disproportionately high, may not be able to generate sufficient returns to meet ongoing costs. To that end, First Actuarial estimates that around three-in-five charity schemes will not be able to generate sufficient asset returns to pay ongoing expenses.
On how smaller charities might adapt, Brown added, “We felt that smaller charities were overlooked by similar surveys in the industry. And as the actuarial partner of the Charities Pension Club, we believe we’re ideally placed to carry out this survey, which we plan to produce annually. We’ll work with clients to benchmark their funding position against similarly sized charities – and as always, we’ll work with smaller schemes to help them run as efficiently as possible.”
