The Pensions Regulator (TPR) is predicting that buyout surpluses could exceed £120bn (€138bn) over the next decade, regardless of whether UK pension funds choose to run on or buy out.
The actual amount of these surplus assets that are distributed over the 10-year period will depend on the actions and behaviours of individual schemes, the regulator said.
Some factors it believes could affect the timing of accessing this surplus will depend on whether a pension fund chooses to access surplus annually on an ongoing basis or wait to take it as a single lump sum at the point of buyout, as well as the size of any buffer to retain in the scheme to allow for adverse experience.
The decision on how to share any surplus release between savers and employers could also affect the timing.
TPR’s modelling explores various scenarios of how the £120bn could be accessed in full over the following decade, and the timing of that surplus distribution, which depends primarily on whether schemes run on or buy out.
In its latest defined benefit (DB) universe projection model report, the regulator said that, based on discussions it had with the UK pensions industry, around half of large pension funds are considering running on in the short to medium term to access the surplus on an ongoing basis.
Therefore, it has undertaken three scenarios, in which 25%, 50%, and 75% of large schemes actively decide to run on and access the surplus, and the remaining schemes seek to buy out when possible.
Under these three scenarios, the surplus the regulator calculated refunded at the point of buyout is £80bn, £52bn and £26bn, respectively, with the resulting surplus that is distributed from running on being £40bn, £64bn and £90bn, respectively.
The timing under the middle estimate (50% of large schemes run on) of the £120bn surplus distribution.
Last May, the UK government announced plans to amend the existing framework for surplus extraction from DB schemes to remove barriers to extraction, while maintaining stringent funding safeguards to protect members’ benefits.
“Running on for a period may bring real advantages for some, especially for large schemes”
Ian Mills at Barnett Waddingham
Around the same time, the Department for Work and Pensions (DWP) estimated that £160bn was ready to boost growth ahead of the government relaxing rules on surplus extraction.
Steve Hodder, partner at LCP, said: “It is great to see forward-thinking analysis from TPR on the £1tn+ question of what happens to UK DB schemes. TPR has modelled a range of scenarios reflecting the future uncertainty, but they all forecast significant pension surpluses, boosting the UK economy over the next decade.
“We’ve long advocated that the UK’s £1tn+ of DB schemes can present a win-win-win for members, sponsors and the wider UK economy. These figures confirm that potential.
“It’s eye-opening that TPR’s analysis shows a £50bn windfall of surplus release over just a three-period between 2027-2030, when the new surplus release rules kick in. While it remains to be seen if the industry indeed moves at that pace, this would present a ‘£10bn+ win’ for the chancellor, potentially within this parliament.”
Ian Mills, partner and head of DB endgame strategy at Barnett Waddingham, said that surplus funding positions present a “significant opportunity”.
He said: “Running on for a period may bring real advantages for some, especially for large schemes, from enhancing member benefits to refunding cash to sponsors, increasing shareholder value.”
Mills added that the priority now is for trustees and sponsors to step back, consider the full range of options, and establish a clear, well‑governed plan that delivers long‑term value and robust security for both members and the sponsor.
