Research by Isio suggests trustees could release significant amounts of capital if proposed government rule changes are implemented.
Defined benefit (DB) pension schemes could return £100bn of surplus to stakeholders over the next 10 years, new analysis indicates.
Research from consultancy group Isio has found that this surplus could be returned to the sponsors and members of defined benefit (DB) pension schemes over the next decade.
In a press release, the firm said it expected approximately 40% of schemes could “invest beyond full funding on a buyout basis while sharing surpluses gradually with members and sponsors”.
Stewart Hastie, partner at Isio, said: “Many UK DB schemes now represent an opportunity rather than a problem to solve. The significant recent improvement in funding presents allows trustees and sponsors of the right schemes to invest past full funding on a buyout basis and gradually share emerging surpluses over the medium to long term.”
Isio said that proposed changes to surplus rules had led to the emergence of “purposeful run-on” as a new strategy for schemes, in place of buyout or self-sufficiency approaches. The latter, Isio said, can often take the form of a low-risk investment strategy that is a “slower journey to buyout”.
A purposeful run-on approach, the firm said, recognised that “in the right circumstances” scheme members and employers may be able to benefit from strong funding positions. Schemes could set a “buffer” level above buyout funding, with amounts above this level shared between stakeholders on a medium to long-term basis.
Hastie added: “Purposeful run-on can be adopted today either as a target destination or by starting to gradually release surplus now for very well-funded schemes. For each scheme, careful thought needs to be given to the interaction of funding, size, maturity, covenant, investment risk and balance of powers under the rules. Early collaborative engagement between employers, trustees and consultants will allow stakeholders to get the most out of their DB schemes.”
Earlier this year, the government announced that it was exploring new powers to extract surpluses from DB schemes, as part of the wide-ranging Mansion House reforms.
Chancellor Jeremy Hunt has also set out plans to require schemes to disclose how much they invest in UK assets from 2027. The intention is to build on the Mansion House Compact and encourage schemes to invest approximately 5% of assets in UK growth assets.
