Fifty per cent of defined benefit schemes are now closed to future accrual, according to new figures from the Pensions Regulator.
A survey of 5,378 DB schemes, as of March 31 2022, also revealed that just 505 schemes – or 9 per cent of the DB universe – remain open, in the continuation of a gradual decline from 13 per cent in 2012.
By contrast, 37 per cent of schemes were closed to new members, with existing members still accruing benefits and half of schemes closed to future accrual – up from 48 per cent in 2021. Four per cent were winding up.
The number of DB schemes surveyed was down from 5,522 in the prior year. “The declining universe reflects schemes completing the process of winding up, scheme mergers and schemes entering the [Pension Protection Fund],” TPR said.
The position is far rosier in the public sector
David Everett, LCP
LCP partner and head of research David Everett said: “The position is far rosier in the public sector. The 6.8mn individuals building up benefits in the public sector stands in stark contrast to the 0.8mn being able to do so in the private sector.”
Evelyn Partners financial planning director Gary Smith noted that “public sector workers continue to benefit from pensions that are more heavily subsidised and payouts that are pretty much guaranteed”, even “if income levels in retirement are largely no longer based on final salary, but rather on career averages”.
Schemes are mulling buyouts
Market volatility in the autumn caused liquidity concerns for some DB schemes, which faced collateral calls from managers of their liability-driven investments.
“The tumult around long-dated government bond holdings that came in the wake of the Kwarteng ‘mini’ Budget caused reputational damage for some private sector DB pension schemes, but in the end members’ pensions were unaffected,” Smith said.
The spike in gilt yields accompanied an overall improvement in funding levels, with many DB pension schemes now being closer to being able to fully insure their liabilities. On average, schemes are six years from buyout, according to Hymans Robertson.
“For sponsors, this can present a dilemma,” Isio director Ian Cochrane said.
“They would like to take the opportunity to remove the pension scheme from the balance sheet for good, but do not want to risk overfunding the scheme by closing the gap too quickly and finding insurer pricing has moved favourably.
“In many cases, a surplus in a scheme cannot be returned to the sponsor, and even if it can be it comes with a 35 per cent tax charge.”
Cochrane said that Isio had seen a renewed interest in escrow arrangements, where the sponsor set cash aside for the scheme so that cash not required for buyout can easily be returned.
“We expect this to further accelerate in 2023 as sponsors and trustees prepare for the path to buyout,” he added.
According to Charles Stanley research, which surveyed professional trustees representing schemes with assets worth around £350mn on average, the proportion of respondents choosing a buyout via an insurer as their endgame target surged to 34 per cent in 2022 from 19 per cent in 20212.
Uplifts for members if buyouts are delayed
DB scheme members, meanwhile, could benefit from a 5 per cent uplift in their pension benefits if their sponsor defers buyout by five years, according to analysis by Hymans Robertson.
The consultancy analysed the impact of FTSE 350 DB schemes deferring buyout by five years, discovering that this could generate an aggregate surplus of £100bn.
Handing two-thirds of this back to their sponsors would give FTSE 350 companies a collective cash injection of £70bn, which amounts to a fifth of their annual earnings. This would allow schemes to use the remaining third to raise member benefits by around 5 per cent.
Higher inflation could delay schemes’ journey to buy out
Roundtable: After years of increased focus on deficits, professional trustees are having to deal with new challenges brought by a move to surplus, members facing a cost of living crisis, an unprecedented market crisis, and a raft of new rules for defined benefit schemes.
Hymans Robertson head of corporate DB Alistair Russell-Smith said: “For some, deferring buyout may be an option or even a necessity if there is insufficient insurer capacity to deliver these timescales if schemes’ data or assets are not ready, or if the accounting settlement loss is not palatable.”
“Delaying buyout clearly comes with the ongoing risk exposure of a DB scheme and should not be taken lightly,” he continued.
“However, there are potential benefits in terms of a cash boost for sponsors and a benefit uplift for members.”
