Defined benefit funding has improved further, and the time to buyout has fallen to an all-time low. While some believe new surplus flexibilities will encourage sponsors to run schemes on, others think they could still look to derisk.  

The average time to buyout for FTSE350 schemes has fallen to less than four years, new analysis by Barnett Waddingham has found. The DB End Gauge index stood at an all-time low of 3.6 years to buyout, falling from four years over the past month.    

The findings are unsurprising given the healthy funding levels of defined benefit schemes. The Pension Protection Fund’s latest update shows aggregate funding increased to 125.6% in May.    

BW’s DB End Gauge index fell as a result of an increase in average swap and bond yields which improved scheme funding levels, explained Barnett Waddingham partner Lewys Curteis. He added that the fall in the index was slightly tempered by a more cautious outlook for future investment returns.      

Curteis said: “Companies and trustees should be properly assessing the relative merits of running on versus an immediate buyout in terms of the economic value that could be generated for companies and members, particularly given the surplus extraction relaxations being proposed by government.”    

A recent poll by consultancy XPS Group found more than half (57%) of schemes are more likely to run on as new surplus rules are introduced, and that three-quarters (76%) plan on adopting the new statutory override for DB surplus.   

XPS head of run-on solutions Tom Froggett said the results align with XPS research from May 2024, which found that 75% of trustees would be willing to manage a surplus-generating run-on scheme, while 57% of employers would consider doing so if a statutory override were introduced.  

He argued that the Department for Work and Pensions’ estimate that out of £160bn in surplus, just £8.4bn would be extracted in the next 10 years is an underestimate.    

“We believe this significantly understates the potential of the new DB surplus flexibilities, assuming effective implementation. Our research suggests that the potential surplus value that could be released safely over the next 10 years could be closer to £40bn, around five times higher than the DWP impact assessment,” said Froggett.   

The continued strength of funding could see sponsors rushing to discuss with trustees about the best route forward to release surpluses, said Jaime Norman, senior actuarial director at consultancy Broadstone. 

 

He suggests that early surplus release does not necessarily need to be coupled with run-on, but could still be followed by a buy-in or buyout. 

 

“Now there is clarity over the government’s plans in respect of funding and the Virgin Media case, and funding remains healthy, we would expect a renewed acceleration in pension scheme derisking into the second half of the year. It has been a relatively quiet period for the bulk annuity market as market volatility and uncertainty over the pension schemes bill caused many to take a ‘wait and see’ approach,” he said.