Running on to generate a surplus will only be viable for larger defined benefit (DB) pension schemes and may not lead to a significant change in asset allocations, according to the Pensions Regulator (TPR).
The predictions form part of a major forecasting exercise published this week by the regulator, exploring the potential evolution of the DB sector under different scenarios. Several of the scenarios featured variations on assumed appetite and capacity for running on.
Scheme size was a “key determinant” of whether or not a run-on strategy would be viable, TPR said, with those with less than £100m in assets unlikely to find such an approach cost-effective.
However, those with at least £1bn would likely give run-on “serious consideration”, the regulator stated. US companies may also benefit from such an approach for their UK subsidiaries due to the way in which insurance buyouts are treated by US accounting rules.
Running on would most likely be seen as an “intermediate step” before approaching the insurance market, TPR said, as ”very few schemes are expected to run on until the last member dies”.
“Running on for a period may bring real advantages for some, especially for large schemes, from enhancing member benefits to refunding cash to sponsors, increasing shareholder value.”
Ian Mills, Barnett Waddingham
The regulator’s report also predicted that schemes opting to run on would likely select an asset allocation similar to an insurance company, with a focus on credit, gilts and illiquid assets, “suggesting no material difference from schemes targeting buyout”.
“Beyond financial considerations, run-on offers flexibility in funding defined contribution (DC) sections, awarding discretionary benefits, enhancing member experience, and retaining governance oversight,” TPR said, while employers could also benefit from access to surplus “on an ongoing basis”.
However, the regulator emphasised that there was still much uncertainty around how surplus assets could be shared, depending on scheme rules, the size of the surplus, contribution history, and negotiations between trustees, employers, and other stakeholders.
What the next decade could bring for DB schemes
TPR’s projections included multiple scenarios for different levels of run-on appetite, as well as a forecast for a potential superfund market.
Under the superfund scenario, the regulator assumed that around 350 DB schemes would be transferred to a superfund over the next decade, predominantly sub-£1bn schemes with a funding level of between 80% and 100% on a buyout basis.
Combined with a consistent appetite among other DB pension schemes to move to an insurance buyout, by the end of the 10-year projection, the regulator forecast that 2,346 schemes would still be independent, compared to approximately 4,700 currently.
Its run-on scenarios produced a similar contraction in the number of DB schemes, with roughly 2,400-2,600 schemes expected to conduct buy-ins over the forecast period.
Ian Mills, partner and head of DB endgame strategy at Barnett Waddingham, said: “While buyout will continue to play a major role, it is far from the only route. We strongly support TPR’s message that trustees should take a rounded view of all endgame pathways, including running on and consolidation through superfunds.
“Surplus funding positions also present a significant opportunity, with TPR estimating that around £150bn could be shared between members and employers over the coming decade.
“Running on for a period may bring real advantages for some, especially for large schemes, from enhancing member benefits to refunding cash to sponsors, increasing shareholder value.
“The priority now is for trustees and sponsors to step back, consider the full range of options, and establish a clear, well‑governed plan that delivers long‑term value and robust security for both members and the sponsor.”
