Risk management: avoiding the nuclear option

• Defined benefit pension schemes can risk creating a funding deficit.
• Avoiding insolvency is paramount.
• Robust risk management is required to manage the issue.

While hidden liabilities come in all sorts of shapes and sizes, the fact that the sector is currently sitting on a very substantial pensions liability has been known for some time. A recent paper indicates that the top 40 charities in England and Wales have pension liabilities totaling £7bn. Clearly this is a problem, particularly where a charity’s pension liability compares unfavourably to its unrestricted reserve funds or annual income (the Hymans Robertson report suggests that for the 40 charities concerned the £7bn compares with £38bn of reserves and £12bn annual income respectively). For an individual charity, the comparison may be significantly less favourable.

Funding deficits: a ticking time bomb

It is defined benefit pension schemes (DBS), sometimes referred to as ‘final salary pensions’, which carry the risk of a funding deficit