The majority (83%) of defined benefit (DB) pension funds in the UK are currently running at a surplus, however, according to research from LawDeb Pensions, many do not have a strategy in place to utilise it.
The research was conducted among 150 finance decision-makers in UK companies with DB pension funds.
It found that 76% of smaller funds, with assets valued between £100m-£249m, report a surplus, with this number rising for pension funds between £250-£499m (90%) and £500m-£999m (93%).
However, while the majority of DB funds are running at surplus, LawDeb Pensions’ research found that many don’t have a strategy in place to consider how to best use it, with 33% still discussing how they would like to use it.
For those that have a clear idea on how to use their surplus, third say they plan for it to be paid into their business or invested in the plan sponsor.
| How firms say they plan DB surplus to be used | Percentage (%) |
|---|---|
|
Pay out surplus to scheme members |
32% |
|
Use surplus for business bonuses |
30% |
|
Donate surplus to charitable causes |
28% |
|
Plan to leave surplus where it is |
26% |
|
Plan to use surplus to fund DC contributions |
18% |
|
Unaware they could do anything with surplus |
1% |
|
Surplus is too small to warrant considering |
1% |
Source: LawDeb Pensions
For those with plans to buy-in, buyout or consolidate, 69% said they plan for the surplus to be paid to the company, if pension fund rules allow it.
Just over three-fifths of companies (61%) say they intend to use the surplus to increase member benefits, while over half (56%) plan to share it between members and the sponsor. A minority (3%) are still discussing what to do with their surplus.
Run on
Despite being in surplus, a majority (76%) of companies do not plan to run on, according to the research, with 41% citing cost and advice being too expensive as a reason, and 36% saying there is too much investment risk.
The risk associated with running on is a recurring worry among the survey participants, with 31% believing there is too much regulatory and governance risk. 27% also believe the risk of legal challenges is too high, while a quarter (25%) are cautious that the scheme may return to deficit or need further contributions.
Run-on also presents itself as more challenging than buying out, the research found, with 27% of firms saying it’s too expensive to have staff manage the fund, and 25% saying it takes too much time and brain power to do so. Similarly, one in 10 (9%) do not have the capacity to manage their fund were it to run on.
On the other hand, one in five (18%) would not know where to begin while 2% haven’t considered running on as an option for their funds at all.
Sankar Mahalingham, managing director at LawDeb Pensions, said: “Surplus is not a novel concept within the pensions industry, but harnessing it for its full potential can prove to be tricky.”
This, according to Mahalingham, becomes even more concrete with the government’s potential pension reforms to utilise these funds to support economic growth, while still protecting members’ benefits.
He continued: “Therein lies the role of an independent trustee, who should proactively engage with the sponsor, while recognising their responsibility to ensure they follow the powers under the Trust Deed and Rules, as well as acting in line with the purpose of the trust.
“An independent trustee can work alongside firms towards making the best decisions, both for the business and for members, rather than companies not engaging in considering which routes would be most beneficial – and potentially missing out as a result,” he said.
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