The top 40 charities in England and Wales have pension liabilities totalling £7bn, a new report shows.
The report, by the pension consultancy Hymans Robertson, examines the defined-benefit pension schemes of the 40 largest charities by income in England and Wales, and says they have a combined £7bn in defined-benefit liabilities, compared with £38bn in total reserves and £12bn in annual income.
The data is from the charities’ most recent accounts as of 28 February 2017.
According to the report, Barnardo’s is the only charity to have a pensions deficit that exceeds its unrestricted reserves, with the average deficit approximately 16 per cent of the total amount in unrestricted reserves.
The report says two charities have deficits that exceed their net unrestricted income: the Church Commissioners for England and the Wellcome Trust. But both charities have significant levels of reserves.
The Wellcome Trust is also paying a "significant proportion" of its net unrestricted income into its pension scheme: approximately 14 per cent, according to the report.
Reach2, an academy trust, has the lowest average funding level for its defined-benefit pension scheme at just over 40 per cent, and seven charities have a surplus, the report says.
It adds that the average funding level for a defined-benefit pension scheme is 86 per cent.
About 43 per cent of charities have closed their defined-benefit schemes to future accrual. Alistair Russell-Smith, a partner at Hymans Robertson, told Third Sector this was "a bit low", but could be down to participation in schemes such as the Local Government Pension Scheme.
But the low-yield environment in which pension schemes operate meant that in many cases contribution rates were "going through the roof", Russell-Smith said.
The amount of money in an investment portfolio set aside for growth products – assets intended to grow an investment – is 60 per cent, the report says.
The report recommends that charities should respond by taking less investment risk and hold on to their investments for a longer period of time.
The report says: "Consider taking a lower level of investment risk and holding that for a longer period of time. This reduces deficit volatility and stabilises cash costs. By holding the remaining risk on for longer, overall returns and hence deficits are not impacted."
Charities should also design funding and investment strategies to pay the projected cash flows, and keep up with emerging developments in the pensions sector, the report says.
It adds that regulation, pressures on fundraising and financial constraints are the three key challenges facing the sector.
Russell-Smith said: "A lot of charities are taking more investment risk in their pension schemes than they need to. Charities want the assets in their pension schemes to work hard for them, but there is no point in getting them to work harder than they need to because they are exposing the charity to more risk than is necessary.
"We think a lot of charities could take a lower level of investment risk and potentially hold that lower level of risk for a longer period of time."