UK Businesses Eager to Put Pension Scheme Surplus to Work

Research from Brightwell finds that 93% of UK businesses surveyed with closed defined benefit (DB) pensions schemes larger than £500 million plan to request access to surplus in their pension schemes once rules are amended[2].

Analysis from the government suggests that the total surplus within DB pension schemes stands at £160bn.

Of the finance decision makers surveyed, 43% said they’d want to access scheme surplus in the ‘near term’ while over a quarter (27%) said they will request access immediately. 16% want to access in the medium term and 7% in the longer-term. 

When asked about their plans for utilising the funds, nearly half (49%) indicated that they would reinvest in UK operations. Additionally, 44% intend to share it with members of the defined benefit scheme, 42% plan to reinvest in global operations, 40% would distribute the funds to shareholders, while 33% would use them to cover costs and expenses associated with running their defined contribution (DC) scheme. Over one in five (22%) of respondents said the surplus released would be used to directly fund contributions to the DC scheme.

A third of respondents (33%) said that having easier access to surplus would encourage them to run the pension scheme on for longer rather than opting for a buyout with an insurance company. Nearly two thirds (63%) said it will encourage a more return seeking investment strategy to help generate future surplus.

A liability to an asset

A third (33%) of companies said they now view their pension scheme as an asset they are interested in outweighing the 28% who view it as something they want off the balance sheet. One in five (20%) said they can see that the pension scheme has the potential to be an asset but comes with too much management and risk while 19% said their pension scheme is always something they’ve managed closely and want to retain control over. 

Morten Nilsson, CEO, Brightwell said: “Up until now, UK businesses had full responsibility for the downside of their DB pension schemes but no access to the upside. The proposed changes will introduce some welcome symmetry into the equation and provide a clear incentive for employers to run their pension schemes on rather than buying them out with an insurer.

“For the changes to succeed, care needs to be taken.  Surplus should only be released where schemes are sufficiently well-funded and trustees are satisfied it is safe to do so. A gradual release would be the most prudent approach to prevent any regret risk.

“Running on a pension scheme isn’t without challenges so having the right investment strategy and expertise is key.”

Zoe Alexander, Director of Policy and Advocacy at the PLSA, said: “The funding position of defined benefit schemes has rarely been stronger, and that is a great boost for the members of those schemes. Schemes must of course continue to monitor the global economic situation carefully given current uncertainties, in order to minimise risks to those surpluses.

“Where they have sufficient confidence, surplus release by schemes provides an opportunity to improve member benefits, boost DC pension contributions, and support new types of investment. It must be accompanied by strict controls to protect member benefits. That’s why PLSA supports measures in the forthcoming Pensions Bill to provide clear a legal and regulatory framework for surplus release.”

To support pension schemes that plan to run on, Brightwell has developed a run-on toolkit which can be found here.