Defined benefit (DB) schemes that delay endgame decisions could be giving up millions of pounds in potential surplus, according to new modelling from Van Lanschot Kempen Investment Management.
The fiduciary manager said improved funding positions and volatile buyout pricing had left some well-funded schemes postponing decisions on whether to pursue buyout, run-on, or another endgame route.
However, its modelling suggested that a £1bn scheme targeting a modestly higher return within a purposeful run-on strategy could generate an additional £35m of surplus over five years compared with a more cautious approach where decisions are delayed.
A £250m scheme targeting the same return levels could generate an additional £9m over the same period, the manager claimed, while a £5bn scheme could generate £178m.
“Two schemes can look similar on paper but deliver very different outcomes over time, simply because one has made a clear endgame decision and the other has not.”
Calum Edgar, Van Lanschot Kempen
Van Lanschot Kempen said the additional surplus reflected clearer alignment between objectives and strategy, rather than simply taking more risk.
Calum Edgar, investment strategist at Van Lanschot Kempen UK, said: “Two schemes can look similar on paper but deliver very different outcomes over time, simply because one has made a clear endgame decision and the other has not. When it comes to endgame, deciding beats drifting.”
The analysis also suggested a £1bn scheme delaying endgame decision-making by one year could forgo £7m in surplus. A three-year delay could cost £21m, rising to £35m over five years and £72m over 10 years.
At the industry level, Van Lanschot Kempen said lost surplus could reach roughly £40bn over the next decade if half of the UK DB universe experienced similar inertia, based on a 70 basis point annual return difference over 10 years.
The release cited the Pension Protection Fund’s latest 7800 Index, which showed total DB scheme assets of around £1.1trn and an aggregate surplus of £263.8bn across 4,838 eligible schemes at the end of May. However, this surplus is calculated on a PPF funding basis, rather than other accounting measures, which show a smaller overall surplus.
Jonathan Craddock, fiduciary manager at Van Lanschot Kempen UK, said run-on would not be right for every scheme, nor would buyout.
He said trustees and sponsors needed to match scheme characteristics to different run-on approaches, including maturity, cash flow, benefit structure, risk appetite and sponsor covenant.
