DC members could see their retirement pots increase by up to 40 per cent if employers use DB scheme surpluses to boost DC pension contributions, according to new research from Van Lanschot Kempen Investment Management.
Currently, UK DB pension schemes have surpluses of almost £300 billion. About £200 billion of this may be wisely allocated to a portfolio of diversified, long-term UK assets. Over the next 20 years, this investment may give the UK workforce, the majority of whom are enrolled in DC schemes, an additional £500 billion in retirement savings.
According to the analysis, each DC employee’s pension contributions may increase by up to £1,000 per year, inflation-protected, if these surpluses are used to improve DC member benefits. Over the course of their working lives, a 25-year-old’s retirement fund would grow by 40 per cent as a result of this 3 per cent rise.
The findings show that businesses have a great chance to take advantage of DB surpluses and significantly boost their employees’ retirement savings.
Van Lanschot Kempen head of UK Andre Keijsers says: “There are over 5,000 DB schemes in the UK. Many of these companies also have DC schemes which creates a dual responsibility to protect the financial interests of their DB scheme members, as well as look after their DC scheme employees who often have an insufficient savings rate. In the latter case, the sponsor might wish to improve their retirement outcomes through increased contributions but are not able to.
“This can seem quite the conundrum for sponsors, but the reality is that the overall UK DB pension scheme system is in rude health. Rises in gilt yields mean many schemes have more than enough assets to match their liabilities, with ample surpluses which can be reinvested in a number of ways.
“This includes using DB scheme surpluses today, and in the future, to enhance benefits for current employees who are mostly in DC pension schemes, without affecting the security of their DB scheme members. This would provide a much-needed boost to DC savers who are often projected to have far poorer retirements than the generations that preceded them.”
Van Lanschot Kempen head of client solutions UK Nikesh Patel says: “Not so long-ago sponsors and trustee boards felt they had limited options and were aiming to transfer their entire pension scheme assets and liabilities to an insurer.
“Now, particularly for well-funded schemes, there are more attractive options which include the ability to run on for longer, thereby putting any future surplus to productive use in a risk-controlled way*, and in a manner that works to create additional value for sponsors, DB and DC scheme members alike.”
