Navigating the uncertain world of DB scheme funding

Navigating the uncertain world of DB scheme funding for not-for-profit organisations

Any mountain climber starts their journey fully equipped – maps, warm clothes, a first aid kit and enough food to last the journey.

But what lies ahead is always unknown, and as we’ve recently seen, unprecedented events can change the environment we are experiencing – potentially long-term.

Many charities and not-for-profit organisations have been hit hard by the recent pandemic. Income from donations, shops and events has reduced and competition for charitable spend has increased. Scrutiny over not-for-profit spend, including operational costs, have also increased. Although plans are in place to get back to normal once the economy recovers, it will take time to achieve.

This coincides with a constantly developing pensions landscape. The Pensions Regulator (supported by charity regulators) is seeking more security for pension schemes than ever before. It’s vital that DB Scheme sponsors and Trustees collaborate when climbing the pensions ‘mountain’ and remember that everyone is on this journey together.

Assessing your fitness

While there are always some exceptions, a lot of our charity and not-for-profit clients’ DB schemes fall broadly into two categories; the underfunded scheme with a long recovery plan; and the well-funded scheme with trustees looking towards buyout or another long-term goal.

For the underfunded explorers, having enough reserves to reach basecamp can be a struggle. Even with a long recovery plan, some scheme trustees might see this as inappropriate as the ‘fast track’ approach under the new funding code is unattainable and requests more funding sooner.

For the well-funded schemes, sometimes the trustees are seeking more funding, which could mean cash being required when the charity has greater need elsewhere, and a greater chance of overfunding. In this instance, the mountaineers may actually be carrying too much weight and are unable to reach the summit.

Checking the conditions

With any journey, you need to be aware of your external environment. The weather has definitely changed and the economic forecast is unsettled, so it’s important to have the necessary assets in place to deal with every eventuality.

Fundamentally, you need to be able to plan and communicate with your team, readily sharing information between the sponsor and the scheme trustees and acknowledging the impact of any decisions on the organisation.

Be prepared to change path

With so many variables, you must be prepared for changes en route and have the capability to be agile and fluid when circumstances require it. Be opportunist to lock in funding gains and keep your eye out for a shortcut to the top but be sure you look at the whole journey, not just individual paths – do the assumptions make sense as a whole, given where you’re heading?

And consider alternative routes – the Pensions Regulator’s new regime has a ‘bespoke’ option for a reason.

Listen to the experts

You wouldn’t tackle Mount Everest without the guidance of a Sherpa, so why navigate your scheme’s funding journey solo? Making sure you have the best advice means you have everything you need at your disposal to get to the summit safely and successfully. Seeking wider advice is also key, for example a health charity may have particular views on the long-term impact of the pandemic for mortality, which can be built into the assumptions the scheme is making.

Peak Performance

However you decide to get to the top, funding discussions are a chance for the sponsor and trustees to collaborate, and the sponsor’s strength is critical to the future funding of the scheme. Working together to understand the issues and the interaction between charitable funding and pensions funding is more important than ever before.

That’s why we’re working with charities to help lay out the risks of the climb but support with the best route ahead, in our bespoke webinars, partnering with CMS and Interpath to ensure charities get the holistic advice they need.

Whilst the new funding regime will present a number of challenges to charities and not for profit organisations, by looking at some real-world case studies we hope to bring these challenges – and some practical solutions – to life.

Having a pension strategy that is deliverable and balances an organisation’s funding needs alongside that of its pension scheme will be critical to ensure sponsoring employers are able navigate their exit from the pandemic on a stable financial footing.

The ‘Emerging from the pandemic’ webinar with CMS and Interpath took place on Thursday 23 September.