TPR shares DB market projections for next decade
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The Pensions Regulator has published its first defined benefit universe projections model report with its projections for the next 10 years of DB schemes. It says more than 2,000 schemes with over £200bn in assets could move to the insurance sector as three-quarters of schemes could buy out over the next decade, but said run-on could be attractive for some schemes.
The DB pensions landscape is undergoing transformation prompted by higher funding positions, legislative changes and new consolidation options, TPR said, adding that trustees and employers need to respond.
The DB pensions landscape is undergoing transformation prompted by higher funding positions, legislative changes and new consolidation options, TPR said, adding that trustees and employers need to respond.
Director of evidence and external risk, Sarah Tune, said: “The step change in DB funding means trustees and employers must actively consider their endgame strategy. Whether that’s running on, consolidating via a superfund or buying out, the decisions you make today will shape the future for your members. Stay ahead of the curve - because in this changing landscape, standing still is not an option.”
She added: “We’ve produced this new report as part of our intent to be more proactive and forward-looking in publishing regular analysis of the pensions landscape, across both defined benefit and defined contribution schemes.”
While up to 2,000 schemes could transfer to insurers, TPR’s discussions with industry suggests that around half of large schemes are considering running on in the short to medium term to access surplus on an ongoing basis.
In order to run on, schemes need to be at least £100m in size, TPR said, with serious consideration being given by those over £1bn.
“Economically, run-on may be beneficial, particularly for US-based sponsors due to the accounting treatment of buyouts. It may also appeal to schemes holding significant illiquid assets,” it noted.
However, TPR said surplus extraction under a run-on model presents challenges.
“Trustees are likely to be cautious, preferring to maintain a buffer above low dependency, with some schemes likely to target solvency plus a margin to reduce the risk of underfunding and future contribution requirements. There is also uncertainty around how surplus assets should be shared, which may depend upon scheme rules, the size of the funding buffer, contribution history, and negotiations between stakeholders,” its summary reads.
The regulator concludes that several barriers to run-on remain, such as asymmetric in funding responsibilities, with sponsors bearing all of the downside risk, concerns about potential future changes in legislation or regulation, and no ability to offset surplus refunded to the employer against trading losses for tax purposes.
While run-on requires some investment risk to generate surplus, “overall asset strategies are expected to resemble those used by insurers – typically a mix of credit, gilts, and illiquids – suggesting no material difference from schemes targeting buyout”, it added.
While up to 2,000 schemes could transfer to insurers, TPR’s discussions with industry suggests that around half of large schemes are considering running on in the short to medium term to access surplus on an ongoing basis.
In order to run on, schemes need to be at least £100m in size, TPR said, with serious consideration being given by those over £1bn.
“Economically, run-on may be beneficial, particularly for US-based sponsors due to the accounting treatment of buyouts. It may also appeal to schemes holding significant illiquid assets,” it noted.
However, TPR said surplus extraction under a run-on model presents challenges.
“Trustees are likely to be cautious, preferring to maintain a buffer above low dependency, with some schemes likely to target solvency plus a margin to reduce the risk of underfunding and future contribution requirements. There is also uncertainty around how surplus assets should be shared, which may depend upon scheme rules, the size of the funding buffer, contribution history, and negotiations between stakeholders,” its summary reads.
The regulator concludes that several barriers to run-on remain, such as asymmetric in funding responsibilities, with sponsors bearing all of the downside risk, concerns about potential future changes in legislation or regulation, and no ability to offset surplus refunded to the employer against trading losses for tax purposes.
While run-on requires some investment risk to generate surplus, “overall asset strategies are expected to resemble those used by insurers – typically a mix of credit, gilts, and illiquids – suggesting no material difference from schemes targeting buyout”, it added.
