DB schemes could generate half a trillion pounds in surplus payments over the next decade if new flexibilities are introduced.
The fiduciary manager said this figure could rise to as much as £1.2trn depending on circumstances, even with significant bulk annuity activity of £50bn a year.
The forecast comes as the Department for Work and Pensions closes its consultation on “Options for Defined Benefit Schemes” – which includes plans to make it easier for schemes to free up surplus funds for additional payments to members and refunds to sponsoring employers.
Arif Saad, head of client advice for UK at Van Lanschot Kempen, said expanding the way surpluses are accessed “will be enticing to both trustees and sponsors alike, who may be interested in the prospect of enhancing member benefits, be that defined contribution or defined benefit members or extracting surplus after decades of deficit contributions”.
Saad cited Pension Protection Fund (PPF) data that showed the aggregate buyout funding level of the UK pensions market was roughly 112% as at 31 March 2023, demonstrating a surplus of roughly £150bn.
Van Lanschot Kempen estimated that this had risen to approximately £210bn by February 2024.
Run-on versus buyout
If schemes choose not to target buyout immediately and continue running on, then they can remain invested in return-seeking growth assets – something the government is keen to encourage.
This includes illiquid assets such as private debt and infrastructure. The latter can also help schemes boost their sustainability credentials, with green infrastructure seen as crucial to the transition to a low-carbon economy.
Van Lanschot Kempen said this could generate an aggregate surplus of around £500bn over the next 10 years.
The firm explained that, by choosing to run on, trustees and sponsors could avoid additional costs associated with buyouts, including legal, actuarial and investment advice. Trustees should assess this benefit against the ongoing costs of keeping the scheme running.
“Completing a buyout in 10 years’ time has the advantage of a stronger funding position, and more scope to meet buyout costs efficiently when there is less demand,” the company said.
Additional funds generated by running on could also be recycled to provide improved inflation proofing, life insurance and medical benefits for DB members, Van Lanschot Kempen said. For sponsors, lower DB contributions could boost cashflow, while the additional funds could also be used to contribute to DC schemes.
Meanwhile, TPT Retirement Solutions echoed Van Lanschot Kempen’s comments in its response to the consultation.
The company said there would be “significant benefit” from providing trustees with flexibilities over how they use any surplus.
David Lane, chief executive at TPT Retirement Solutions, said: “These reforms could create a much greater incentive for schemes to consider run-on, serving as an alternative solution to an insurer buyout.
“This could benefit trustees, sponsors, and members by providing more endgame options. Running-on to access scheme surpluses could lead to improved member benefits and increased business investment.”
Lane also called for commercial consolidators such as TPT to be given the power to standardise benefits. This is one of the proposals for the PPF, as the government has also set out plans to allow the lifeboat fund to consolidate small schemes.
Lane said standardising benefits should be an option open to all consolidators to ensure fair competition.
Further reading
WPC recommends changes to governance, surplus rules (26 March 2024)
What can DB schemes do with funding surpluses? (26 February 2024)
DWP plans to free up DB scheme surpluses (26 February 2024)
