DB Pension scheme members could benefit from a 5 per cent uplift in their pension benefit if the corporate sponsor defers buy-out by 5 years.
According to Hymans, deferring buy-out is advantageous for both the employer and the trustees/members. Hyman’s says that without it, there is less chance that a trustee board will consent to postpone the buy-out.
Hymans Robertson’s annual FTSE 350 DB Pension Scheme survey examined the effects of delaying buy-out by five years for the FTSE 350 DB schemes and discovered that it might result in a £100bn total surplus.
By returning two-thirds of this to the sponsors, the FTSE 350 would receive a cash boost of £70bn or 20 per cent of its yearly earnings. The remaining third might then be used by the schemes to raise member payouts by around 5 per cent.
According to the data, DB pension systems typically have six years till buy-out. With higher rates and better insurer pricing, this deadline has passed 2022. Insurer capability, scheme readiness, and the accounting settlement loss on buy-out all indicate, however, that some may choose to postpone buy-out, generating surpluses in the process.
Hymans Robertson head of corporate DB Alistair Russell-Smith says: “The estimate in our 2022 FTSE 350 report has shown that FTSE 350 schemes are, on average, now only 6 years away from being able to secure buy-out with an insurance company. For many DB schemes this will be welcome news and they will be heading on a route to buy-out that it exactly the right path for them. However, for some, deferring buy-out 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 buy-out clearly comes with the ongoing risk exposure of a DB scheme and should not be taken lightly. However, there are potential benefits in terms of a cash boost for sponsors and a benefit uplift for members.”
According to the research, 45 per cent of the FTSE 350 should be able to comply with Fast Track without having to make larger monetary commitments under TPR’s new funding scheme. Nevertheless, adhering to Fast Track will result in higher cash payments for 55 per cent of the FTSE 350, notably for the 10 per cent of those having plans that are already
Russell-Smith adds: “With TPR’s second consultation on the new funding regime expected imminently and the regime itself expected to go live in late 2023, now is the time for corporates to start assessing their options. Companies will be able to adopt a “Fast Track” or “Bespoke” funding strategy. While Fast Track meets preferred minimum standards, Bespoke allows more flexibility at the risk of more regulatory intervention. Fast Track would seem the obvious route for the 45 per cent of companies that can adopt this route without increasing contributions. The other 55 per cent should consider their options more carefully, and in particular assess if a reasonable funding plan can be developed under Bespoke without increasing cash contributions.”
Additionally, the Pensions Regulator (TPR) published its annual report on UK defined benefit and hybrid schemes 2022.
Isio director Ian Cochrane says: “This year’s report shows the DB landscape continues to evolve as more schemes improve their funding position, close to new accruals, and begin to look at end game options.
“The Regulator’s latest figures only run to 31 March 2022, but after the turbulence of the last few months, we have seen a rapid acceleration of DB scheme maturity. Many DB pension schemes have ended up much closer to being able to fully insure their liabilities, a target that before may have been considered unachievable in the short term.
“For sponsors, this can present a dilemma. 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.
“Therefore, we are seeing a renewed interest in escrow arrangements, where the sponsor puts cash aside for the scheme so that amounts not needed for buy-out can easily be returned. We expect this to further accelerate in 2023 as sponsors and trustees prepare for the path to buy-out.
“While the concept is straightforward, the implementation can be complicated by differing views of how the escrow should or could be structured. Early engagement with the escrow bank or escrow agent is critical and we hope to see more consistency in the approach to agreeing the appropriate structure.”