Pension schemes could return £100bn of surplus over the next 10 years

Isio analysis reveals the amount which could be shared between DB sponsors and members

13 March 2024: Approximately £100bn of surplus could be returned to the sponsors and members of defined benefit (DB) pension schemes over the next ten years, according to analysis from Isio. It expects that around 40% of schemes, by asset size, could invest beyond full funding on a buy-out basis while sharing surpluses gradually with members and sponsors.

Most DB schemes have traditionally targeted one of two long-term destinations – buy-out or self-sufficiency. In practice, self-sufficiency entails a cautious, low-risk approach to investing that only achieves a slower journey to buy-out.

Purposeful run-on (PRO) has emerged, against a backdrop of government support for unlocking value from DB schemes and their surpluses, to recognise that in the right circumstances there may be a better way for scheme members and employers to benefit from reaching very strong funding positions. Isio’s approach to PRO sets a target buffer above full buy-out funding and once this is reached surplus is gradually shared between the employer and members over the medium to long-term.

Under Isio’s PRO framework schemes could return around 17% of their assets to sponsors and members over the course of a decade. If 40% of the c.£1.4 trillion of UK DB assets are used in this way, that is nearly £100 billion could be shared between members and sponsors.

With the current aggregate surplus across the UK’s c.5,000 private sector DB schemes estimated at £250 billion, many schemes are already in a position to start distributing surplus. This will normally be possible without the overriding legislation to ease surplus distribution that the government is consulting on.

Through Isio’s approach to PRO, schemes’ assets will be invested to continually replenish surpluses with the expectation of releasing an average of around 2% – 2.5% of assets per year without taking excessive levels of risk. Payments to employers would only be made following an annual assessment showing a surplus on a buy-out basis, with the payment being less than the surplus and accompanied by a simultaneous discretionary increase to members; benefits.

Stewart Hastie, partner at Isio, said: “Many UK DB schemes now represent an opportunity rather than a problem to solve. The significant recent improvement in funding allows trustees and sponsors of the right schemes to invest past full funding on a buy-out basis and gradually share emerging surpluses over the medium to long-term.

“PRO can be adopted today either as a target destination or by starting to gradually release surplus now for very well-funded schemes. For each scheme careful thought needs to be given to the interaction of funding, size, maturity, covenant, investment risk and balance of powers under the rules. Early collaborative engagement between employers, trustees and consultants will allow stakeholders to get the most out of their DB schemes.”