Three-quarters of professional trustees would consider run on for schemes with at least £250m of assets and over half would consider it for schemes with at least £100m of assets.
Over 70% of professional trustees believe guidance from the Pensions Regulator would be the most effective change to remove behavioural barriers for schemes to run on.
Isio has published its survey of professional trustee’s views about scheme run on. Isio surveyed 83 professional trustees, managing over 800 pension schemes with over £350bn in assets.
Trustees comfortable with member share of surplus being lower than the employer share
Isio’s survey asked trustees about the minimum share of surplus that would need to be used to improve member benefits to justify running on. Nearly a third of trustees (30%) have not yet considered this, but of those who have, more than two-thirds (68%) are comfortable that a member share of 40% or less of the surplus would be sufficient to justify running on over the medium to long term after insurance first becomes affordable.
On average, trustees appear willing to reflect the fact that employers take on 100% of downside funding risks with a higher employer share of surplus, aligning with the position that Isio expects most employers to take.
However, trustees are only willing to start releasing surplus once schemes are very well funded
Whilst more permissive legislation for releasing surplus from ongoing surplus would be welcome, in practice only around 30% of trustees would be comfortable to start returning surplus to an employer in ongoing schemes that is not yet fully funded on a buy-out basis. Isio suggests many schemes can do this today using their Purposeful Run On (PRO) framework, which maintains a buffer above 100% funding on a buy-out basis after each surplus distribution. Over half of professional trustees surveyed would like this buffer to be 5% or more.
Caution on investment strategy could be a barrier to running on with purpose
Investment returns outperforming insurance pricing discount rates is a key source of expected surplus generation. Isio asked professional trustees what a typical investment return target should be for schemes planning to run on for at least five years beyond the earliest opportunity to purchase a full scheme buy-in.
Isio found that over half (55%) of trustees would ideally target an investment return ranging between gilts plus 1.0% per annum and gilts plus 1.5% per annum, with almost a quarter (24%) preferring a more conservative investment target of gilts plus 1.0% per annum or less.
A cautious approach to investment strategy is understandable given the de-risking journeys that many UK DB schemes have been on. However, Isio’s modelling suggests that a target of between gilts plus 1.5% per annum and gilts plus 2% per annum will typically give a better balance between targeting sufficient expected upside for members and employers while maintaining a very low probability of moving into a technical provisions deficit.
Minimum scheme size for run on is lower than you might think
Many market commentators argue that there is a minimum scheme size for run on to be practical for members and employers, as running costs are a higher proportion of assets for smaller schemes, leading to a greater drag on expected surplus generation.
Isio’s research revealed that over half (56%) of trustees surveyed who had already formed a view, believe that schemes with at least £100m of assets are viable for run on. This figure increases to three quarters (75%) of trustees who would consider run on for schemes with at least £250m as assets. Interestingly, nearly a quarter (23%) of respondents felt there is no minimum asset size for schemes looking to run on.
Isio believes that run on strategies may be attractive for very well-funded, immature schemes smaller than £100 million due to the faster improvement in insurance pricing from retirements and ageing. It also expects that employers with US parent companies sponsoring small schemes may push for run on due to the unfavourable accounting treatment for buy-out under US GAAP.
Trustees want more guidance from the Pensions Regulator
To date it has been extremely rare for trustees to release surplus to sponsors before schemes enter wind-up. Isio asked professional trustees to choose up to three changes that would be most effective in making it more common to release surplus from ongoing schemes. Over 70% of professional trustees cited balanced and comprehensive guidance from the Pensions Regulator as being effective in removing behavioural barriers to gradually sharing surplus between members and employers. This was significantly more than the next highest scoring change, with less than half (48%) of trustees prioritising the introduction of a statutory override to allow surplus to be returned to sponsors irrespective of restrictions in scheme rules.
Matt Brown, Director at Isio, commented: “Most professional trustees have an open mind to different ‘end games’ and see the employer’s views as key for deciding an approach. Employers that favour running on will be encouraged that most professional trustees would be comfortable for the member share of surplus to be less than the employer share. It can be easier to agree the sponsor’s preferred approach if it is raised early, so it is important for sponsors to model and quantitively assess different options."
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