Keep calm and carry on managing the endgame
This amount equates to approximately 10% of FTSE 350 defined benefit (DB) scheme assets, and two-thirds of the total dividends paid in 2022 by the FTSE 350 DB scheme sponsors.
The analysis assumes that any surplus above 105% funding on the Pensions Regulator’s proposed “Fast Track” low dependency basis would be available to be returned to sponsors.
Tessa Page, a partner and UK wealth strategy leader at Mercer, said: “It’s so tempting to come up with these numbers. The chancellor’s statement in the Mansion House reforms also had lots of big numbers about freeing up all this money and what it could do for pension scheme savers. But it’s all made up.
“It’s all made up.”
Tessa Page
“But we won’t know if there’s a surplus in any pension scheme until we get to the very end of its life, and they’ve paid out all the benefits. So, the idea that we know what it is today, is silly.”
Even if a surplus is created, who owns that surplus is different for every pension scheme, because it’s a “trustee and rules lottery”.
“Then, there’s the question of what it might be used for – to top up member benefits, which would be lovely for the pensioners, or will the company have control over it?”
Sponsors are targeting innovative alternatives to endgame
However, Vanessa Wells, a legal director with law firm Eversheds Sutherland, said that the Mansion House is not just about the future of pension schemes, but the past – the 1990s to be exact.
“We’re starting to see lots of innovation from sponsors and because they could be developing surpluses,” said Wells. “We never thought we’d get back to this.”
And sponsors are not just interested in trousering the cash – if they are able to – they are looking for more tax efficient ways to make use of it.
“Winding up the scheme and taking a 35% tax hit is exactly what a few clients want to avoid, and particularly where they’ve got other pension schemes within the group,” said Wells.
“As a result, we’ve sort of seen some innovative scheme mergers, with DC sections being bought back within the business rather than just giving it out to a master trust.”
Sponsors in this position could take a permanent DC contribution holiday if there is a permanent surplus pool of capital. But some sponsors are looking at using the surplus for the benefit of employees.
“We’ve got some clients that are looking to do more than just DC contributions and are really thinking about employee benefits in a much broader way,” said Wells.
“This includes paying insurance premiums to enhance death benefits and may, possibly, even lead to the offer of private health insurance, too.”
Some of the surplus assets are invariably held in illiquid assets such as property, said Wells, and trustees do not want to be forced to realise what they may consider undervalued assets.
The number of schemes and sponsors looking at this level of innovation is small, admitted, but among her clients, it is into double figures.
“We know that there’s a significant number of schemes targeting a surplus on a technical provisions basis, so the next step on a journey plan for them is self-sufficiency.
“That’s an area where we’ve been seeing the investment providers trying to innovate.”
Moving the needle
Page said there needs to be a reality check on how trustee boards work, because “they’re not in the business of shopping around for private equity managers”. But other parts of the ‘reforms’ and various consultations closing next week offer more compelling opportunities.
“It will be interesting to see how the call for evidence on trustee skills, whether every trustee board should have a professional trustee and whether the professional trustee is fit for purpose will be plays out,” said Page, and pondered whether the consultation on DC value for members might be the catalyst towards greater consolidation, moving DC schemes into master trusts.
“They may sound a little more niche,” added Page, “but they will probably will have a bigger impact than whether schemes invest a little more into private market assets, which most schemes will conclude that they probably won’t.”
