Over the next ten years, sponsors and participants in defined benefit (DB) pension schemes may receive a return of over £100bn, according to Isio.
About 40 per cent of schemes might make buyout investments over their total funding, progressively distributing surplus funds to sponsors and members.
Most DB schemes traditionally aim for either buy-out or self-sufficiency. Isio introduces Purposeful Run-On (PRO) as a new approach, recognising opportunities for members and employers to benefit from strong funding positions. Schemes may return about 17 per cent of their assets to sponsors and members over ten years under Isio’s PRO structure.
The private sector DB schemes in the UK are anticipated to have an aggregate surplus of £250 billion; hence, many can distribute surplus without further legislation.
Isio’s PRO strategy, which aims to release between 2 per cent and 2.5 per cent of assets annually without taking on undue risk, involves an ongoing investment to replenish surpluses.
Isio partner Stewart Hastie says: “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 buy-out basis and gradually share emerging surpluses over the medium to long-term.
“PRO 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.”
