Defined benefit (DB) trustees are feeling pressure from the government and employers to use new surplus release rules to return cash from overfunded schemes to sponsoring companies, according to new research.
A survey of 50 professional trustees conducted by Barnett Waddingham found that all respondents said pressure from the government to use surplus release powers could conflict with their fiduciary duties.
One in five (20%) of the trustees surveyed said this pressure was “significant”.
“As more schemes weigh up [endgame] options, balancing member, sponsor and trustee interests will be critical.”
Alex Pocock, Barnett Waddingham
Despite these concerns, the research showed that nearly two-thirds of professional trustees (62%) said they were more likely to consider run-on strategies to generate surplus. In addition, 82% said a low dependency funding basis was a “more appropriate long-term funding target than buyout”, the consultancy reported.
Barnett Waddingham said that, over the past 12 months, a third of medium-sized pension schemes had moved from self-sufficiency to run-on, while two-thirds (67%) of large schemes had shifted focus from insurance buyout to a self-sufficiency approach.
Trustees also indicated that some schemes were seeking to generate a “super surplus” that could be used to grant discretionary member benefit increases or pay back sponsoring employers.
Alex Pocock, managing partner at Barnett Waddingham, said it was “not surprising” that more pension schemes were considering options outside of the insurance market, given that “many schemes that wanted to buyout have now done so”.
“The debate around surplus use is a natural consequence of that progress,” Pocock continued. “Trustees will recognise the opportunities that surplus capital can create, but our findings show that they’re also firmly focused on their responsibilities to act in members’ best interests.”
In a recent blog post, the Pensions Regulator’s (TPR) executive director for market oversight Ben Gunnee highlighted that “while insurer buyout may still be the preferred choice for many schemes, it’s not the only option”.
“New endgame models and approaches are making many trustees look again at their long-term objectives and consider whether there is potential to not just pay members their promised benefits, but also safely release surplus for the benefit of members and sponsoring employers,” Gunnee said.
TPR plans to work with the government on its surplus release guidance to “make sure that the regulatory environment is robust and able to respond to a variety of market conditions”, he added.
Barnett Waddingham’s Pocock said: “It’s understandable that policymakers want to create greater flexibility and make better use of surpluses, but that doesn’t have to come at the expense of member outcomes.
“The recent surplus proposals are a positive step forward, but trustees will still need the confidence to make use of these new flexibilities while remaining aligned with their fiduciary duties. As more schemes weigh up these options, balancing member, sponsor and trustee interests will be critical.”
