Over half of defined benefit (DB) pension schemes in the UK would consider ways of securing benefits for their members beyond insurance-based solutions, according to Aon.
The research was conducted by Aon among webinar participants who were interested in the pension effects of the recent Mansion House Speech by the Chancellor of the Exchequer. Aon polled the 330 webinar participants, who included trustees and scheme sponsors, on the potential long-term strategy alternatives for their DB scheme. The majority, 61 per cent, indicated that they were willing to weigh multiple options.
Around 82 per cent of respondents who were asked what options they would weigh stated they would consider a potential insurance buyout of their plan. But 51 per cent also said that they were open to the idea of continuing with the pension plan over the long term with a low return ‘self-sufficiency’ goal.
The most popular of the Chancellor’s suggested measures to encourage long-term investment in UK productive assets was to run-on and target pension excess. Around 30 per cent of respondents preferred continuing the scheme with an investment strategy targeted at maximising value for scheme stakeholders, including the sponsor, while 26 per cent stated they would consider using a commercial consolidator or superfund. Moreover, 17 per cent of respondents said that they would think about using a public consolidator, which might be the Pension Protection Fund.
Aon partner and head of UK retirement policy Matthew Arends says: “Our polling shows a strong desire by schemes to consider a range of options for their long-term strategy. Considering how active the bulk annuity market is right now, it is perhaps not surprising that the most popular option remains an insurance buyout. It’s clear that many see this as the default approach for discharging pension risk, navigating new forms of volatility and securing member benefits.”
Aon partner and head of alternative endgames John Harvey says: “I believe there is untapped value in many well-funded pension schemes, so it’s really interesting to see that nearly a third of respondents would consider running-on their scheme in order to build up surplus over the long term. In many cases, a higher-return investment target over a longer period can unlock benefits for both members and scheme sponsors – if there is appropriate covenant to support the scheme.
“We are already seeing some well-funded schemes adopting these strategies without undue risk. The options that are being explored in the Department for Work and Pensions’ (DWP) call for evidence, such as easier refund of surplus, could make it still more attractive for schemes to run-on with a higher investment return target.”
Arends adds: “Our poll also showed the continuing interest from schemes in commercial consolidation. With that in mind, we welcome the introduction of a permanent supervisory regime for commercial consolidators. However, the ideas in the DWP call for evidence about a potential public consolidator are currently at an early stage and will need careful review before they are added to the DB landscape.
“In order to maximise outcomes for all their stakeholders, it’s vital that schemes consider the full range of long-term strategic options that are available to make a more-informed decision. That may mean having to revisit existing endgame plans, as both the range of viable options and the scheme’s circumstances may have changed significantly over the last year.”