Alternatives to buy-out – the new DB surplus opportunity

The Government’s new pension policies and the DB surplus opportunity – Willis Towers Watson

Thanks to Willis Towers Watson for an excellent seminar yesterday. I am now a lot clearer in my head about the “DB surplus opportunity” though I’m not clear why (as the slide intimates) schemes that could afford buy-out shouldn’t choose bolder options!

I guess it’s my job to push the boundaries but is there not an opportunity for well-funded pension schemes to either consolidate and to offer members some of the upside potential offered by consolidators? Are trustees condemned to managing legacy through run-off? Or are there opportunities going a begging?

Could it be possible to seed a new occupational scheme with the surplus -either on a DC or CDC basis within an existing trust, using the surplus and leveraging the purchasing power of the DB scheme to create new vibrancy in a corporate pension strategy?

Could the commercial consolidator, or the PPF – be a means to offer upside to members within the new regulatory framework?

Could a super-levy be paid to the PPF to provide full protection on member benefits incentivising the trustees to be more ambitious in their asset and liability strategy.

Could DB schemes offer scheme pensions for those with DC pots either under scheme rules or through a decumulation CDC plan within the existing trust?

Returning surplus whence it came

I appreciate that the productivity of UK companies has been impaired by the cash-calls on their pension schemes and I can see strong arguments for surpluses to be returned from where they came – to the sponsoring employer.

These monies have been incentivised by the tax-payer at contribution and monies within the fund have grown largely tax-free, individuals would expect to pay tax on withdrawal and so should sponsors. This taxation should not be penal,  but there should be clear fiscal advantage to sponsors not to withdraw capital committed.

If we are to invest in productive capital, it should be with a view of common good and that should include the good of employers who sponsor DB plans.

The best means for this to happen is through the pension scheme itself to be productive. Which is what the Pensions Regulator is now looking for DB plans to do. Nausicaa Delfas, TPR’s CEO has published on this blog that intends the DB funding code to be relaxed to enable DB pensions to be more ambitious in their investment strategy and to embrace risk rather than avoid it.

The surplus within pension schemes has to be considered as offering more than the opportunity to buy-out. Members should be able to participate in any decision, not just the sponsor and the trustees.

And I believe that many trustees will declare a moratorium on buy-out, pending the arrival of alternative options, including the development of CDC, pension superfunds and developments of trustee investment plans that give access to master trust’s investment platforms – within own scheme rules (something that is being trialled in the AVC market).

A new opportunity for hybrid schemes and holistic consultancy.

I am not keen on the idea – in a consolidating market – of occupational schemes being started afresh within DB plans. This seems an unnecessary duplication of effort and a waste of money.

We have only begun to explore the capacity of progressive funders of  master trusts to use the functionality and investment platforms they have built for their trustees, for the wider market.

The scope for innovation is immense and I hope that great consultancies , such as WTW, will consider these opportunities , not as part of a limiting DC remit, but integrating the DC and DB practices to one aim.

This is furthering the Government’s objective of narrowing the gap between DB and DC and promoting the idea or workplace pensions as an equal opportunity for differing cohorts of employees.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Alternatives to buy-out – the new DB surplus opportunity

  1. Peter CB says:

    I agree with your comment ” you fail to understand why schemes that could afford buy-out shouldn’t choose bolder options!”

    In reality by saying a scheme can afford buy-out, actuaries are actually saying one set of assumptions (the realisable value of the assets) matches or exceeds another set of assumptions (the buy-out cost which is almost universally based on a gilt yield assumption). Unless the buy-out occurs at the valuation date these are purely assumptions, but far too often so called experts try to run the scheme as if they were reality for example in recommending LDI or worse leveraged LDI to manage “funding risk”.

    The true test of a scheme’s capacity to pay the pensions as they fall due will be its cash flow – is the income received from its investments over the lifetime of its liabilities sufficient to meet those liabilities as they fall due? The market price of the capital assets is only relevant at the date those assets are sold. Similarly the mortality assumptions are irrelevant in a closed scheme, it is the actual scheme experience that will determine the amount of the future pensions that need to be met, so updating forecasts on an annual basis rather than a triennial basis is far more critical than considering the Covid weighting applied to the mortality assumptions.

    Looking at the Call for Evidence it is fairly clear that the DWP is trying to challenge the focus on actuarial valuations towards a consideration of “what could the scheme achieve if it considered its asset base as an opportunity”. Hence the consideration of who would benefit from future surpluses and what protections need to be in place for Members if it goes wrong.(PPF lifeboat) and is it appropriate for the lifeboat to be in control of the whole ship?

  2. stefan zaitschenko says:

    Hi Henry,

    An interesting and thought provoking article. BSPS2 has just completed its buy-in by L&G which triggers the second and final payment to the members using the 3% surplus. The Trustee has just told us they have no plans to move to Buy-Out which keeps them in jobs! Members have expressed their concern and frustration that they had no say in the transition to Buy-In or Buy-Out.

    When the scheme was created in 2018, the Trustee and Pension Office Team thought it would take 10 years for assets to grow to 103% at buyin/buyout level. As it only took 5 years, members are understandably asking why the scheme did not remain as a DB scheme holding and managing its assets as now the door has been shut on any future discretionary payments to members.

    Of course, the sponsor, TSUK and Trustee were clear that the 103% trigger was a prerequisite for BSPS2 being allowed. The buy-in does pass risk to L&G and our pensions are protected at the current terms except for the unlikely event of L&G becoming insolvent. Yet we still remain with TSUK as sponsor (in name only). The Trustee have decided to keep paying PPF a “much reduced” levy for protection although we would go in and out of assessment quickly.

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