Defined benefit pension schemes sponsored by the largest UK charities have seen a “significant increase” in their funding levels, a financial services firm has said.

Hymans Robertson’s annual report on defined benefit pension scheme funding in the sector highlights figures from the 40 biggest charities by annual income in England and Wales.

The report says the funding level of the schemes operated by the charities in its sample had increased from 81 per cent in 2019 to 99 per cent this year. 

Both assets and liabilities of defined benefit pension schemes have dropped to about £7bn, with a larger drop on the liability side.

Combined annual income for the 40 charities in its sample rose by about 20 per cent over the same period to £15bn, the report says. 

Heather Allingham, actuary and head of pensions consulting for charities at Hymans Robertson, said: “Although we expect most charity schemes will be targeting buy-out, this rosier financial picture may prompt some charities to consider if run-on is a viable option for them, particularly those charities with larger schemes.”

A run-on framework allows economic value to be built up and then extracted from a pension scheme over time, without risking the long-term security of member benefits. 

Allingham said: “Charities should be engaging with their pension scheme trustees to plan their end-game strategy and ensure the scheme is managed appropriately with that in mind.

“Finally, charities and their pension scheme trustees should be preparing for the new funding code of practice, with a particular focus on how to best measure the covenant strength of the charity. 

“We would suggest that charities might want to focus on their affordability levels and cash flow reliability period.”