One in two of the largest DB schemes are now looking to run on, due to improved funding and legislative changes that will allow for surplus extraction.
This goes against wider trends across the industry with the majority of smaller and mid-sized schemes still targeting buyout.
These figures were in WTW’s latest Endgame Report, which also found that almost four out of 10 respondents (37 per cent) said that trustees and sponsors were currently not well aligned on this issue, which also highlighted differences on how surpluses should be divided between sponsoring companies and members.
Overall the report found that 65 per cent of DB schemes say that they expect to transfer liabilities to a third party, usually an insurer, but this falls to 50 per cent amongst £1bn+ schemes.
While 85 per cent of schemes had already considered endgame options carefully, the report said it was clear these strategies were not necessarily finalised, with 57 per cent anticipating a further review within two years.
The report looked at what would be deemed acceptable when it comes to surplus sharing. It found that on average both sponsors and trustees were likely to find a deal acceptable if members received one third of the money distributed.
However WTW said there was a range of responses on this issue. A minority of respondents (6 per cent) said such a deal would only be acceptable if members got the lion’s share of a payout, with the rest would accept either a fifty-fifty split (35 per cent) or various splits in the employer’s favour (supported by 59 per cent of respondents).
The Government has indicated that it will reduce the statutory funding hurdle for making payments to an employer, but schemes can set buffers on top. Nearly half of respondents (44 per cent) anticipate being prepared to share surplus relative to the proposed new basis. This rises to 58 per cent amongst £1bn+ schemes.
Of the schemes that are targeting a buyout, two thirds expect to do so by 2032. Where schemes are already fully funded on a buyout basis, 56 per cent expect to insure all benefits by 2029.
Overall around 70 per cent of respondents regard buyout as a good deal for members and for sponsors. Nearly all (97 per cent) say that insurers get a good deal; only 18 per cent say that buyouts represent a good deal for the UK economy.
WTW senior endgame strategist and head of trustee consulting Adam Boyes adds: “The Government says that the potential for members to gain from employers having easier access to surplus while a scheme is ongoing is vital to the success of its policy and sees trustees’ veto over any surplus release as a strong negotiating card.
“In playing it, trustees will be mindful of the circumstances of their scheme, including what the rules say, the balance of powers between the trustee and the employer, and any reasonable expectations that members might may have. While most trustees surveyed indicated that they would settle for members receiving less than employers if surplus were to be distributed while the scheme is ongoing, these views will be provisional and the precise division will vary scheme by scheme, potentially by a lot.
“Where trustees are willing to accept less than a 50:50 split, this might be for a wide range of reasons, such as: the employer having previously paid large contributions that ultimately were not needed, or because the employer’s capacity to provide further funding in adverse scenarios makes run-on and surplus-sharing possible.
“Although security of promised benefits is consistently cited as a priority, surpluses may provide opportunities for member benefits to be improved and could, for example, be used to help preserve pensioners’ purchasing power if there are future bouts of high inflation. This is not dissimilar to the PPF, which itself has large reserves, looking to add some inflation protection to certain pre-1997 compensation in future.
He adds: “The Government is minded to set a lower funding hurdle for making payments to an employer. Almost half of respondents say that, if their scheme ran on, they would probably be prepared to share surpluses relative to this basis, which is still a prudent one.
“In other cases, trustees will want further safety margins and employers may want to be even more confident that they will not have to pay contributions in future. While the often-quoted £160bn is not going to distributed at the first opportunity, the amount of surplus on the table is still material. Many schemes would have significant funds available to distribute to members and sponsors even if they want to remain able to pay a buyout premium should their strategy change.”
WTW senior endgame strategist and head of corporate pensions consulting, Bina Mistry says: “Improved scheme funding and competitive insurer pricing means that most schemes can now afford the most expensive item on the menu – buyout – and place more emphasis on factors other than price when selecting a provider.
“With schemes now able to choose from more endgame strategies than ever before, some of the destinations previously pencilled in are being reviewed. Making promised benefits secure is a top priority, but there are different views about how best to achieve security and how to balance this against the prospect of benefit enhancements and surplus refunds.
“Superfunds and sponsor swaps provide cheaper ways to get a pension scheme off the employer’s balance sheet. While three quarters of respondents think that insurers are meaningfully safer than superfunds, one in four of these would seriously consider a superfund over buyout if there was a prospect of delivering higher member benefits.
