Whether to pull the buyout lever – a harder decision than ever? 

2023 was a record year for defined benefit (DB) schemes passing assets and liabilities over to insurers. For those who have transacted one key benefit has been the mitigation of legislative risk, in other words that a government or regulator’s actions make running a DB scheme more painful. For a long time, travel has been in one direction: the bar for funding a DB scheme has been raised and the governance burden of running one has increased. Of course, there has been upside for members with stronger regulation having improved the security of accrued benefits, but this strengthening of regulation has been one of the key drivers in the closure of DB schemes and pivot to DC provision. 

Beyond buying out and winding up a DB scheme, options for mitigating or managing legislative risk are limited. With trustees still working to equalise GMPs while also focusing on pensions dashboards, the new DB funding regime and additional climate (and potential nature) related disclosures this direction of travel might look set to continue for some time. But is it? Or could the balance here be about to shift from a risk mitigated to an opportunity missed? 

The long-awaited new funding regime is due to apply for valuations with effective dates later this year. Currently it will raise the bar for some: faster funding and derisking. But generally schemes are starting from much stronger positions than when the new rules were conceived, and these stronger positions mean schemes are better resourced to manage both short and longer-term funding risks.  

The Work and Pensions Select Committee (WPC) has been lukewarm about the new funding regime, noting that it was a result of The Pensions Regulator’s focus on protecting the Pension Protection Fund, an objective it has recommended could be disposed with¹. Of course, select committees are not part of government and do not always succeed in influencing policy makers. The last parliament’s WPC was chaired Stephen Timms, now a minister in the DWP. Whether his colleague Emma Reynolds, the new pensions minister, shares these views remains to be seen. However, it is possible that the winds could be changing here. 

The Government’s pensions review is now under way. It appears Labour’s review will have similar aims to those previously stated by the last Conservative government, namely encouraging consolidation and “productive” investment to support growth in the UK economy and improve pension outcomes. The first phase of the review focusses on DC provision and the Local Government Pension Scheme, but we might expect it to turn its attention to DB matters later this year. The last government was seeking to meet its aim through loosening rules on surplus access, allowing members and sponsors to share in the upside of and so incentivising investment risk. If this government picks up where the last left off, the benefits from schemes choosing to run on could be amplified. 

Without a doubt a DB buyout will still be the right answer for many trustees and sponsors, but there is a rare opportunity for DB schemes to become more (not less) attractive in the coming months and years. With this uncertainty some might be taking a “wait and see” strategy to run on at least for the short term, rather than rush to transact.

Footnote

1. The Work and Pensions Committee’s Third Report of Session 2023-24 on defined benefit pension schemes