For The Pension Regulator’s (TPR’s) whole existence we have worried about scheme deficits and a lack of longer-term planning.
When a sponsoring employer of an underfunded pension scheme becomes insolvent, those members may go into the Pension Protection Fund (PPF). While the PPF can provide valuable compensation, the impact of this transfer can be material to members.
Those members are often older people who have little or no chance to make up the shortfall in their expected retirement income.
That is one of the reasons we worked to implement our new DB funding code. We want to make sure all schemes are focused on the long-term and focus our efforts and powers where they can really protect members' benefits.
Today the defined benefit landscape looks very different to when we were set up 20 years ago. Our analysis from 30 September 2024 estimated that 75% of schemes are in surplus on a low dependency basis with an estimated £160bn spread across the market. Even on a buyout basis our analysis shows that 49% of schemes are in surplus by as much as £97bn across the market.
This new funding environment has brought new options and choices to trustees.
In the past, trustees and employers have considered insuring benefits as the end goal of their scheme. The insurance sector has capital requirements which mean that insurers can withstand 1-in-200-year shocks. It is still a good option for many.
But insurer buyout is not the only option for trustees to consider.
Ongoing market innovation has led to a wider range of financial, governance, and insurance options. Each have their own pros and cons.
Not every option will be right, or even available, for every scheme. Trustees need to really think about the specific circumstances of their scheme and their members.
That is why we've produced new guidance for trustees and employers, to help them consider the range of new models and options available.
From appointing a professional trustee to considering a superfund, it sets out some of the factors to consider, with several case studies providing examples of the questions trustees should be asking themselves.
It's critical that trustees take advice and undertake an appropriate level of due diligence, think about the different risks and opportunities, and document the steps taken when making any decisions.
Running on and surplus
While the path to buy-out is well-trodden, running on – and potentially releasing surplus – is a new consideration for many DB schemes.
And for those schemes with scale and high governance standards, that have the right combination of employer covenant strength and funding level, it could be an option to consider.
It has been many years since surplus was last a common topic of discussion. But we are now in a very different pensions landscape to 30 years ago and at the time, the way surplus was assessed was very different, based on much lower levels of funding and member protection.
Surplus release won't be right for everyone. Nonetheless it is right that well-run, well-governed and, crucially, well-funded schemes can consider releasing surplus, should they wish. And it's right that our latest guidance goes into more depth to support trustees in considering the range of options.
Schemes should have documented policies regarding their long-term objectives and end game options, including surplus – particularly if releasing surplus could strengthen the employer covenant and enhance member benefits.
Government has set out its intention to reform the law in this area. Until then the current rules apply, which are different in the case of an ongoing scheme compared to a scheme in wind-up. For the latter of these, we have recently had a case before our determinations panel which will be useful for schemes to read.
We will be engaging more on this area with our regulated community and industry once we have further visibility of the proposed legislation.
Next steps
We hope our new models and options guidance helps you engage with your advisers and have better informed discussions around the range of options that might be available to your scheme.
Clearly, we can't provide advice, but through our market oversight and supervisory engagement, we are open to proactive dialogue as you consider your options.
Patrick Coyne is interim director of policy and public affairs at The Pensions Regulator
