Schroders becomes latest employer to use DB surplus for DC
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UK asset manager Schroders has said it will run its defined benefit pension scheme on and use part of the current surplus to finance contributions to its defined contribution section, which remains unchanged. The announcement follows the government’s statement this week that it will legislate for DB surplus extraction.
The trustees of the hybrid Schroders Retirement Benefits Scheme will be able to use about 10% a year of the DB section’s surplus for DC contributions, the firm said on Friday. This will be done within “guardrails”, such as regular funding level and covenant checks, as well as a mechanism to recoup contributions should the DB section’s funding level deteriorate.
“Given the funding level and additional safeguards we put in place, we were comfortable agreeing a prudent level of surplus sharing given Schroders’ commitments to its pensions. The negotiations were wrapped into our 2023 valuation discussions which, combined with separate legal advice, enabled us to have the best understanding of our current actuarial position,” said trustee chair Lisa Mundy, from trustee firm Bestrustees.
Schroders chief financial officer Meagen Burnett said: “Schroders has worked closely with the wider trustee group to deliver a structure that works for all stakeholders.”
Schroders puts the improvement of its DB section’s funding level – which is beyond its long-term target – down to a cashflow-driven investment strategy put in place in 2019. The DB fund also uses liability-driven investment and buy-and-maintain credit portfolios managed by Schroders Solutions. Infrastructure debt, multi-asset and securitised credit are handled by the firm’s specialist teams.
Aon and A&O Shearman provided actuarial, covenant and legal advice. Aon partner Jonathan Wicks said about Schroders’ decision to run on: “For schemes in their position and where trustees and sponsors work closely together, we believe that a very high level of benefit security can be provided for members and significant value generated for sponsors via careful risk management strategies. This can provide favourable upside compared to buyout with an insurer in the right circumstance.”
The asset manager is not making any improvements to its DC offer to staff, using DB surplus to replace part of the current level of company DC contributions. The manager makes an 8% non-contingent employer contribution and on top of this matches employee contributions up to 5% of salary. For employees who joined before February last year, the non-contingent contribution is 16%, with salary matching up to 2%.
Auto-enrolment legislation refers to contributions having to be made by the employer, and a 2023 call for evidence suggested DB surplus could be used for “additional contributions over and above statutory minimum contributions for auto-enrolment for DC members”. This could suggest that the law’s reference to employer payments for minimum contributions should be interpreted narrowly, as having to be paid with company cash rather than DB surplus.
