The current £500bn (€561bn) deficit of UK defined benefit (DB) pension funds could be halved by schemes thinking laterally about a range of options besides investment returns and contributions, according to consultancy Hymans Robertson.
Alistair Russell-Smith, head of corporate DB at the firm, said: “Taking advantage of new opportunities in the consolidation, risk transfer and investment markets could create billions of pounds of additional value across UK DB.”
In a new report the firm suggested schemes consider shrinking their deficits by, for example using new types of risk transfer and capital-efficient investment strategies, where physical securities are replaced with synthetic ones, and allowing members to switch to defined contribution (DC) pensions.
Russell-Smith said companies relying simply on investment returns and contributions to reduce the deficit could remain “on-risk” for many years to come.
“With 75% of schemes already cashflow negative there is an urgent need to fill the funding gap and this can only be done if schemes are open to thinking in a different way,” he said.
He said pricing for both pensioner buy-ins and whole scheme buy-outs was currently the most attractive that his firm had seen in recent years.
“There are also newly emerging ‘end-game’ solutions such as non-insured risk transfer and insured self-sufficiency,” he said.
Non-insured risk transfers involve transferring all scheme assets and liabilities into a new DB master trust backed by additional capital provided by external investors, the report’s authors explained. They gave The Pension SuperFund and Clara-Pensions as examples of emerging DB consolidators .
Insured self-sufficiency, meanwhile, was where an insurer worked with a scheme to manage some, or all, of its assets and liabilities as if these were part of its annuity business book.
Using these products could reduce the total UK DB deficit by £100bn, the firm said.
It also said trustees could adopt capital-efficient strategies – whereby traditional asset classes are replicated, with, for example, synthetic equities being used instead of physical equities and leveraged LDI in place of Gilts.
Such strategies allowed schemes to achieve the same investment returns for less upfront capital, said Susan McIlvogue, head of trustee DB at Hymans Robertson.
“If these were implemented widely, a further £50bn could be wiped off the total UK deficit,” she said.
She also said pension transfers from DB to DC, and “other member options” could reduce the DB UK deficit by as much as £100m.