Defined Benefit scheme run-on – For the few or the many?

11 November 2024

In recent years, many schemes have found themselves with improved funding levels, greatly reducing their reliance on sponsors. It has become widely accepted that well over half of schemes can now afford, and may choose, to gold-plate pension benefits by securing them with an insurer.

The questions is – should they?

There’s a generally accepted wisdom in finance that bigger is often better.

In pensions, that is most likely to be achieved through consolidation in one form or another. And that’s why we see a flurry of insurers rushing into the bulk purchase annuity market to grab their slice of the pie.

A similar argument can be made for capital backers, asset managers, the Pension Protection Fund and, to some extent, those in the adviser community too. But perhaps it’s those in government who have the most to gain – their eyes must be burning brightly at the prospect of unlocking the £1.4 trillion or so in the coffers of UK Defined Benefit schemes and making it work more productively for the benefit of the wider economy.

2024 – A tale of two markets?

Looking at the transactions carried out by insurers through the first three quarters of 2024 will tell you at least part of the tale. Although we have continued to see near-record numbers of transactions, the volumes of deals transacted through to the end of the Summer were falling short of 2023 levels. This suggested that while appetite may remain from the ‘smaller’ schemes, there may be a different dynamic at play that is capturing at least some of the attention at the larger end of the market.

Will there be a spate of late deals for larger schemes – along the lines of 2023 – or has something else got their attention? If the last few weeks are anything to go by, which has seen Deutsche Bank, Michelin and NatWest announce multi-£bn deals, I suspect the answer will prove to be ‘a bit of both’.

Time to pause… and run-on?

For some of those larger schemes at least, the financial prize offered by run-on has perhaps caused them to pause and take stock – and, as The Pensions Regulator (TPR) has so rightly encouraged – “consider all the options”.

And if run-on can genuinely offer better outcomes for both sponsor and member in some scenarios, it’s perhaps right that we pursue this option.

Besides, for a £multi-billion scheme with the right backing, the numbers can be so compelling that it would be rude not to take a peek, at the very least.

Is bigger always better?

But what if you’re not a £multi-billion scheme? What if you’re a £100m or (he whispers) a ‘small’ £40m, £25m or even £10m scheme? There are still plenty of those schemes around.

Taking the question to a simple level, if you ask any of my three kids that question, the answer is most definitely no. They are quicker, faster, stronger, cuter and already (most definitely) smarter than me.

And I’d have to agree.

Yes, size matters, but it’s only one metric against which a decision can, and probably should, be framed. Relying on asset size alone is lazy. We all know it’s what you do with it that counts – the ratios of expenses to assets and net returns respectively are much better metrics in my humble opinion.

Yet, in truth, the answer is even more nuanced than that.

If it’s not all about size, what else matters?

As we speak to more and more clients about scheme run-on, it’s often the softer, non-financial angles that shape which end game the sponsor and trustees might be minded to pursue. Whether it’s:

• The simple fact that run-on is much better aligned to schemes still open to accrual or whose period of ‘significant maturity’ is still comfortably distant on the horizon
• Concerns about value for money currently offered by the insurance market
• A desire to do something more meaningful with the assets they’ve worked so tirelessly to build up– rather than simply gifting them to the insurance market
• A desire to offer members more than what is currently available from the current crop of insurers – whether that be more personal, tailored administration services, broader support, better option terms or a broader suite of benefit options
• Accounting issues about the detrimental impact pensions transactions can have on the sponsor’s bottom line, or
• Simply a good old-fashioned commitment to see things through to their natural conclusion

… it’s likely that run-on will remain a viable option for those schemes with the covenant visibility and complementary objectives to support it.

In the meantime, conversations about surplus sharing will rumble on.

Is it time for a different perspective on run-on?

Run-on can and will work for schemes of all sizes.

But to make it work, you need to look at it through the right lens, and with the right backing and the right adviser – one that’s willing to challenge conventional thinking and put the needs and interests of their client first.

So, whether you’re a £15m scheme or a £100m+ scheme, all the end-game options deserve their place on the drawing board, and should stay there until such time as you rule them out. [H2] Get in touch with our experts

Trustees and employers are now getting to grips with the need to explore non-insured solutions for their schemes.

On Tuesday 19 November at 11am, our run-on specialists will host a webinar to explore (and maybe dispel) some of the myths associated with run-on. Find out more and register here. It would be great to see you there.

Alternatively, to discuss your scheme and the options available to you, contact your usual First Actuarial consultant, myself, or any member of our dedicated run-on consulting team.