Not-for-Profit Sector – Defined Benefit Pension Schemes

Defined Benefit Pension Schemes may be increasingly rare in wider society but they remain in many not for profit organisations.  

At AAB, we have many clients in the sector with such schemes, operating alongside defined contribution schemes, with only a handful of staff remaining in the defined benefit schemes. One question we ask clients, particularly during the annual audit process, is if they have considered obtaining a final settlement for the pension scheme, as it could be less onerous than continuing contributions and facing increasing contributions via ever changing assumptions year on year.   

This of course depends on the funds available within not for profit sector organisations, which have been heavily impacted due to the pandemic. 

Changes are expected in 2022 to defined benefit pension schemes and these changes could see not for profit sector organisations with defined benefit pension funds having less time to meet fund deficits, resulting in increased monthly contributions. 

What is a defined benefit pension scheme? 

A defined benefit pension scheme is one that depends on the number of years you have worked for your employer and your final salary. How much you get is determined by the rules of your pension scheme, rather than investments or the amount you’ve paid in over the time of your employment. 

This scheme is great for employees but is a huge burden to employers which is why this is less common in workplaces today. Many defined benefit pension schemes today experience scheme shortfalls where scheme liabilities exceed scheme assets. In simple terms this means the amount a pension scheme is required to pay out is higher than how much money is available to pay out. This results in employers having to fund shortfalls via monthly contributions through pension recovery plans.  

Shortfalls in defined benefit pension schemes arise for many reasons such as increases in life expectancy, under-performing investments and currencies, underfunded pension schemes or long term low interest rates. 

Changes being proposed? 

In 2021, there was news of proposed changes to the pension rules in how not for profit sector entities fund their pension schemes which could see increased pension contributions as a result. Changes will result in two approaches to funding pensions. One of which is a standardised and prescriptive ‘fast track’ approach which could impose tough funding targets. Another is a more complex ‘bespoke’ approach where charities and other employers will need to spend time and money justifying why they need to be treated differently. 

The Pensions Regulator has been carrying out consultations with for profit organisations and then not for profit organisations to hear concerns and views on the changes. 

What not for profit organisations should do? 

The Pensions Regulator has urged that that the not for profit sector be proactive in seeking an understanding to these changes and what it means for them. 

Get in touch with us to discuss your defined benefit pension schemes and we will keep you up to date on the proposed changes and what this means for you.  

If you would like more information or guidance on issues relating to Defined Benefit Pension Schemes or Not-for-Profits in general, please contact Natalie Boyle, Audit Director.

Find out more about AAB’s Public Sector & Not for Profit team here.