As part of its response to the Government’s consultation on options for DB pension schemes, XPS has carried out a survey of 150 trustees and sponsors representing over 300 pension schemes with assets estimated at £420 billion. This sought the industry’s views on Government proposals to legislate to incentivise DB schemes to run on for surplus.
The survey highlights a clear willingness of trustees and sponsors to run schemes on collaboratively, but only where strong protections are in place to protect funding levels and members.
Support for running on
Key insights from the survey are:
• 75% of trustees are willing to manage and govern a scheme that runs on for surplus - in contrast to the perception that trustees may not see this as being in line with their duties.
• 57% of sponsors would seek to run on their scheme for surplus if the government introduced an override to allow surplus extraction.
• 74% of trustees and 93% of sponsors feel that any new statutory power to distribute surplus should need to be agreed between trustee and sponsor.
Wayne Segers, Partner at XPS said, “The survey reflects what we are now seeing in the industry. Trustees and employers are standing back and together objectively exploring what the right future strategy is for their DB scheme and members. While most trustees and sponsors are open to exploring the option of running on, that has to be where it is right for their members and where the downside risks to the sponsor can be safely managed and are proportionate to any upside. We still see the majority of schemes decide insurance is the right destination, but more and more are choosing to run on.”
Defining and managing surplus
The desire to balance managing risks against the potential value to members and sponsors is clearly shown in views from the survey on how to determine surplus and reduce risk:
• 61% of trustees believe that a buffer above buyout funding should be maintained if any surplus is extracted on an ongoing basis.
• In contrast, only 30% of sponsors shared the view that a buffer above buyout should be maintained. 47% felt that a buffer of some form above low dependency was adequate.
The different views above are reflected in views on the most important protections to put in place when running on for surplus:
• 63% of sponsors believe that following a low risk, low volatility investment is important compared to just 45% of trustees.
• 61% of trustees believe having a strong employer covenant is important compared to just 40% of sponsors.
Wayne Segers added “There is a clear steer that sponsors support being able to extract surplus below buyout but critically would want to adopt a low-risk investment strategy to manage the risk of deficits emerging. This reflects our view that when running a scheme on it is important to ensure a stable predictable flow of surplus. This allows a degree of certainty of being able to improve member benefits and deliver some value to the sponsor.”
We also explored views on how surplus should be used
• 24% of trustees and 60% of sponsors believe the majority or all of any surplus should be refunded to the sponsor.
• Just under half of trustees (46%) believe that surplus should first be used to provide an agreed level of benefit improvements to members with the rest being refunded to the sponsor.
• 53% of trustees and 77% of sponsors believe there should be no restrictions on how a sponsor uses the share of surplus refunded to it.
Desired changes to regulations
The survey also dug into what regulatory changes sponsors and trustees would wish to see:
• 77% of trustees expressed that regulatory guidance or a new code of practice or both is needed to support trustees that run on for surplus.
• 41% of trustees felt that having the Pension Protection Fund (PPF) cover all of benefits would help support them when running on for surplus. Only 33% of sponsors felt that having full PPF cover would make them more likely to seek to run their scheme on for surplus.
Wayne added, “in our first research paper last year on future DB strategy we set out a proposed way that schemes could safely run on for surplus. A cornerstone of this was providing trustees with a blueprint to support them through either a code of practice or regulatory guidance. We are encouraged that the Government has taken forward this idea in their proposals and that the idea is supported by a significant number of trustees.”
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