What’s been happening and what’s on the horizon in the world of pensions
![chris_wagstaff Chris Wagstaff](https://www.columbiathreadneedle.co.uk/uploads/elementor/thumbs/chris_wagstaff-pkwit08l5nd2hrdjipmmm5cbycjc5qgjci801t8ats.jpg)
The £1.5tn asset pool of the UK’s 5,000+ increasingly well-funded corporate defined benefit (DB) schemes, is attracting considerable attention from a variety of interested stakeholders. Notable amongst these are bulk annuity providers, for whom a now widely anticipated buy-in and buyout bonanza lies in prospect. However, against the backdrop of widespread regulatory-driven and buyout‑targeted investment de-risking, an alternative and almost diametrically opposed direction of travel for UK corporate DB has been proposed by consultants LCP and WTW — each of which seeks to benefit multiple stakeholders. This edition of Pensions Watch considers the key facets of these proposals and asks whether they could realistically reverse a deeply entrenched de‑risking mindset and the notion of a swift transition to buyout being the only end game in town.
A swift transition to buyout has seemingly become the only end game in town…
On 22 September 2022, then Chancellor, Kwasi Kwarteng unveiled the biggest tax give away since the “Barber Boom” of 1972. Targeting a growth plan akin to Chancellor Anthony Barber’s “dash for growth”, the gilt market was immediately spooked by the unfunded and uncosted nature of these gargantuan tax cuts, culminating in unprecedented fixed income market turmoil, as gilt yields recorded their biggest ever one day move and soared to 14-year highs. However, despite the consequent significant losses incurred by Defined Benefit (DB) scheme liability driven investment (LDI) portfolios, what immediately became apparent was that DB funding levels had, in the main, improved to such an extent1 that buyout had, almost overnight, become a viable proposition for many — at least for those in an appropriate state of preparedness.
In fact, over the weeks and months that followed, a swift transition to buyout began to be framed as the only end game in town, despite the obvious capacity constraints of bulk annuity providers and the general lack of readiness of many well-funded DB schemes to progress to buyout in the short to medium term. Indeed, although accepting that for most, if not all, schemes, buyout is the natural ultimate end game,2 such is the momentum that has been building around more immediate buyouts, it’s recently been suggested that, by end-2026 up to £300bn of DB assets and liabilities could transfer to insurers, while by 2029 more than half of UK corporate DB assets could be in the hands of insurers.3
…yet further reinforcing the regulatory-driven move to de-risking
So why do well funded schemes de-risk?
Is the de-risking narrative a fait accompli or is there another way?
LCP’s and WTW’s proposals
WTW’s six proposals to seize the pension surplus opportunity
1. Create a legislative mechanism by which a DB scheme’s surplus can be used to finance contributions to benefit DC members in a different scheme.
2. Reduce the tax rate on refunds of surpluses to an employer, ideally to align with the corporation tax rate.
3. Amend legislation to more readily allow refunds on surplus while a scheme is ongoing.
4. Remove some tax barriers to sharing surpluses with DB members.
5. Ensure that the final DWP funding and investment strategy regulations do not funnel schemes into obsessive de-risking, and that they allow open DB schemes to thrive.
6. Revisit the Pension Regulator’s statutory objectives to encourage an approach to regulating DB pension schemes that considers members’ broader interests beyond solely protecting accrued pensions.
The characteristics and benefits of adopting growth-oriented run-on portfolios
Buyout remains an option and the ultimate end game