Aberdeen Group and its pension trustees are running the 147% funded defined benefit scheme on, having considered buyout, and pulling active defined contribution members into the trust while they await details of the government’s surplus rules. 

The scheme is an example of how sponsors and trustees of heavily overfunded schemes look to make use of surplus as they wait for government legislation around surplus access.

Aberdeen’s DB surplus stood at £827m in December last year, with technical provisions funding at 147%. The Scottish asset management house and its pension trustees had previously considered how to access this excess capital; in 2023, the trustees sought confirmation from the Court of Session to understand if they can enter a buy-in agreement with a view to buyout and – after having used some surplus for members to fix inflation increases on wind-up which were previously discretionary – pay the surplus to the employer.

The court decided that the trustee would be entitled to do this. Despite this verdict, the scheme is now saying it is running on. 

Trustee chair Christopher Wheeler, from Bestrustees, emphasised that the current arrangement retains “flexibility to pivot the strategy, should there be a route to provide a more optimal outcome for both Aberdeen and DB members in future”.

Access to the DB surplus of ongoing schemes could become easier under measures in the pension schemes bill.

A wide range of strategies, including buyout and wind-up, have been considered by Aberdeen and its trustees, Wheeler said. However, with the rise in DB funding levels since 2023 and the potential for a statutory override to access surplus, both Aberdeen and the trustees were keen to ensure that any strategy pursued in the near term should avoid complexity and the scheme should not enter into an arrangement that cannot be unwound, in case another strategy is later seen as “more optimal as a result of reform”, he explained.

He added: “We will continue to review the appropriateness of the current strategy and terms of the arrangement as more detail comes to light.”

The trustees do not anticipate any changes to the current arrangement in the near future as a result of the bill, however, as Wheeler noted that regulation and guidance are not expected to be in force before the end of 2027.     

In the meantime, the scheme is reorganising its DC provision. Nearly all of Aberdeen’s active DC members were in a group personal pension before an employee consultation that concluded in March this year, when active GPP members were given the option to participate in a bulk transfer. About 60% – roughly 2,200 – took this up and joined a small number of existing DC members in the trust, bringing DC own trust assets to around £250m. Deferred members continue to be in the GPP.    

Wheeler said there were a number of drivers behind bringing GPP actives into the trust, including simplified management from DC consolidation, as well as “giving employees access to a market-leading pension arrangement with a strong trustee governance structure”.   

He also cited better communication, member engagement and providing employees with access to a new investment default solution “at a competitive price point” but admitted that DC being in the same trust as the overfunded DB section has other advantages, too.    

“The consolidation of DC arrangements has served to enable Aberdeen to benefit from a more significant capital benefit under the surplus utilisation arrangement,” he said, but argued the agreement around DC contributions “was independent” of the decision to move members.    

Even as DB surplus is being used for DC, the trustees expect it will be largely maintained because of the low level of investment risk in the scheme. Wheeler said protections are in place to ensure surplus and liquidity do not fall below certain thresholds as a result of surplus usage under the current arrangement.  

While the company is already effectively accessing DB surplus for DC contributions, DB members are not leaving empty-handed. Some member benefits that were previously discretionary have become guaranteed, as suggested in the court case, and trustees are now able to use some of the surplus to provide modest increases to scheme benefits on a periodic basis. 

The agreement to improve certain benefits was part of wider negotiations between the trustees and the employer on a framework around surplus utilisation.  

“Whilst the Court of Session confirmed that any residual surplus upon wind-up of the scheme would return to Aberdeen, there was a strong desire from both parties to reach an agreement around strategy that represented a good outcome for both members and Aberdeen,” explained Wheeler, stressing that the company and trustees enjoy a strong relationship.  

Not many schemes have completely changed their DB pension strategy because of the proposed surplus access rules, said Laura McLaren, head of DB scheme actuary services at consultants Hymans Robertson, but those who were already considering run-on are approaching this with greater conviction. Others have taken a strategic pause to spend more time considering the growing range of options, she observed.

“Certainly buyout is no longer seen as the only choice, especially for larger schemes,” said McLaren. “We expect the number of schemes reassessing their endgame strategy will only continue to grow following the government’s recent surplus announcements.”

Where schemes are looking to run on, she said it is crucial that trustees and sponsors work together. 

She recommended agreeing overarching principles for aspects such as timeframes, flexibility, risk and uses of surplus so that efforts are focused and to avoid misaligned expectations.

Trustees must consider the member perspective, she said – citing the value members place on discretionary increases, trustees maintaining control of the member experience and/or retaining member options – and weigh this against risks such as a deterioration in the employer covenant and any additional security that can be provided to support the scheme. 

“When it comes to building a resilient run-on framework it’s all about finding the right balance aligned with objectives,” McLaren said. 

With new flexibilities unlikely to be fully in place until 2027, she said trustees and employers have time to develop their thinking as policy unfolds.   

Over the past couple of years, a lot of DB schemes have decided to put strategic plans on hold amid uncertainty about if and how the new surplus flexibilities would be applied, agreed Ian Mills, head of DB endgame strategy at Barnett Waddingham.   

For those looking to access surplus and sharing it with members, Mills noted that they may want to consider if surplus has arisen because of decisions taken when the scheme was in deficit.

For example, if there have been past reductions to members’ benefits, e.g. the lowering of accrual rates, or increases to members’ contribution rates or discretions being applied more conservatively, then these are all arguments to suggest that members should be ‘made whole’, now the scheme is in surplus,” he said.

However, he also argued that although many trustees may see their job as getting a ‘good deal’ for members, “this isn’t actually their role”.

Instead, they need to strike a deal that is fair. “The trustees have a legal duty to all the beneficiaries of the trust, including the scheme sponsor. In most cases, it will be right that the sponsor retains the lion’s share of the surplus, simply because most sponsors have, in hindsight, paid far more into their schemes over the past 10-15 years than was, with hindsight, actually necessary.”

He advised trustees and sponsors to carry out a detailed analysis of the financial implications of running on, considering risks and rewards from the perspectives of both members and the sponsor.

This includes tax considerations. There is currently uncertainty about whether the 25% surplus release tax applies on a net or gross basis. Mills expects this to be addressed to avoid companies gaming the taxman by contributing and then refunding on a net basis.
   

   
He called for taxes to be under one roof so companies can offset tax due on surpluses released against other tax reliefs they may have, including from DC contributions. It would mean scheme sponsors could avoid triggering the surplus tax when using DB surplus for DC contributions without having to have DC members in a hybrid trust. 

“This would simplify the decision on how to provide DC benefits, making it about finding the best scheme for the best price, rather than creating artificial tax planning incentives that may lead to conflicting objectives,” said Mills.