The scale of surplus extractions from private defined benefit (DB) schemes could be smaller than industry expectations, the Pensions Policy Institute (PPI) has warned.
Under the recently passed Pension Schemes Act, the process – or the withdrawal of excess funds from a funded pension plan once its total assets exceed its liabilities – was expected to become easier.
However, a PPI report suggests that while schemes are now in surplus, the amount that can realistically be released may be lower than headline estimates initially suggested.
Sponsored by Standard Life, the Association of British Insurers (ABI), Aptia and Pensions UK, the research showed there were several factors, including the durability of surpluses, initial funding ratios, and differences in liability measures across schemes with different endgame strategies.
PPI also noted that funding positions vary sharply depending on how liabilities are measured. While Section 179 and technical provisions measures show widespread surpluses, the aggregate funding ratio was around 95.8%, with a significant minority of schemes still materially underfunded on this basis.
The report warned that surplus sustainability depends on funding resilience and investment risk.
PPI modelling found that durability varies with starting funding ratios, scheme maturity, accrual status and investment strategy. For example, run-on schemes that closed to new entrants and future accruals 10 years ago face an over 26% risk of falling into deficit over a 25-year period, even with 120% technical provisions starting point, if no remedial action is taken.
The research said surpluses had been driven by higher long-term interest rates, stronger asset performance, revised longevity assumptions and historic sponsor contributions.
Shantel Okello, PPI policy researcher and lead author of the report, said expectations of widespread surpluses across DB schermes may not reflect the realities of extraction.
“Our modelling has identified significant variations of funding resilience and investment risk, with endgame strategies for individual schemes and differences in liability measurement also critical to understanding the true scale and accessibility of surplus extraction,” she said.
Claire Altman, managing director of pension risk transfer and individual retirement at Standard Life, added that for schemes considering run-on, confidence in both the resilience of the funding position and the strength of the sponsor covenant over the long term was “critical”.
