“This year’s report shows the DB landscape continues to evolve as more schemes improve their funding position, close to new accruals, and begin to look at end game options.
“The Regulator’s latest figures only run to 31 March 2022, but after the turbulence of the last few months, we have seen a rapid acceleration of DB scheme maturity. Many DB pension schemes have ended up much closer to being able to fully insure their liabilities, a target that before may have been considered unachievable in the short term.
“For sponsors, this can present a dilemma. They would like to take the opportunity to remove the pension scheme from the balance sheet for good, but do not want to risk overfunding the scheme by closing the gap too quickly and finding insurer pricing has moved favourably. In many cases a surplus in a scheme cannot be returned to the sponsor and even if it can be it comes with a 35% tax charge.
“Therefore, we are seeing a renewed interest in escrow arrangements, where the sponsor puts cash aside for the scheme so that amounts not needed for buy-out can easily be returned. We expect this to further accelerate in 2023 as sponsors and trustees prepare for the path to buy-out.
“While the concept is straightforward, the implementation can be complicated by differing views of how the escrow should or could be structured. Early engagement with the escrow bank or escrow agent is critical and we hope to see more consistency in the approach to agreeing the appropriate structure.”
The Pensions Regulator’s annual report on DB pension schemes
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