Why charitable DB schemes shouldn’t rush to buy-out.

DB charity schemes funding position June 2022 (Hymans Robertson)


Stephanie Hawthorne has written another well researched and thoughtful article on defined benefit schemes funded by charities for their staff.

These schemes are different from corporate DB schemes in a number of ways. 40% of them are open to future accrual, including the Local Government Pension Scheme which many charities house members in as participating employers.

Charitable schemes rarely took on LDI (I know of exceptions but they are few). Instead , many argued and got the right to invest less in gilts and more in growth, which has left them with the benefit of high gilt yields (in their technical funding position) without the pain from having a majority holding (or synthetic holding) in gilts. Many charities have committed their fixed assets to the pension scheme which are effectively mortgaged as “contingent assets” . The need for this kind of collateral is less and charitable schemes are becoming less of a burden on the charities.

Stephanie’s articles explains that many charities are now in a position to exchange their scheme assets for a buy-out of liabilities with insurers. There is something of a capacity crunch for this right now and I suspect that charities may not be at the front of the queue.

But is it a queue they should be standing in. Many charitable trustees might consider that selling their pensioners and their current staff’s future pensions to an insurer , short changes staff pensions of the potential upside of long-term pension management. LGPS – which is one of several multi-employer schemes that charities participate in, is not just solvent but busy funding many of the activities that charities themselves are involved in, some charitable activity is funded by pension schemes!

Buying out of good quality schemes that are doing good works, does not sound what charities would naturally do. Selling off the pension scheme to insurers does not sound any better,

But the fact remains that the cost of running DB pension schemes to a charity may not represent value for money. Multi-employer schemes such as the Pensions Trust, which was originally set up to provide charities with an answer to scale, are now well placed to take on liabilities and provide future pensions cheaper than can be done by the charity’s own scheme. Other consolidators such as Stoneport are being set up to compete.

Finally, waiting in the wings are superfunds. Unlike the consolidators, which manage the schemes but leave the funding obligations on the charities, superfunds take the funding risk on themselves, promising to pay the pensions independently of the sponsoring employer – the charity.

Sadly , so far there is only one superfund open for charities to talk to, Clara. A second is awaiting it regulatory assessment period to close so that it can offer itself as an alternative to consolidators and insurance buy-out. The second superfund is actually called Pension Superfund and it looks well worth charities waiting for.

In an interesting comment on Linked in , Tim Bentley , a regulatory expert at Phoenix, comments.

..while wind up and buying out with an insurer provides some member security, it fixes pension increases and prevents pensioner members receiving any discretionary augmentation in the future. What’s good for the employer isn’t necessarily good for the members.

Charities who keep their own scheme and avoid  buy-out , can continue to provide future accrual for members. Consolidators and one superfund (at least) are promising member upside if funding news remains good for their schemes, charities should be careful not to leap too soon and may find the long queue to get to buy-out may be a blessing in disguise.

And of course another kind of pension scheme, CDC – is also now available and it is hoped will be available through a multi-employer scheme soon.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , , . Bookmark the permalink.

1 Response to Why charitable DB schemes shouldn’t rush to buy-out.

  1. Martin T says:

    See my comment on the previous entry which is just as pertinent here

Leave a Reply