Research by Van Lanschot Kempen has found that a £1bn defined benefit (DB) scheme could lose £200m in value by defaulting to buyout over the next decade.
Van Lanschot Kempen’s projections also show that de-risking towards buyout could cost such a scheme a further estimated £50m in missed returns over the same period. For larger schemes, the potential opportunity costs and lost values are proportionally higher.
According to the investment and fiduciary manager, increasing regulation, the short-term volatility of funding positions, and the growing pressure on corporate balance sheets and cashflow have all driven pension scheme trustees and sponsors to prioritise an insurance buyout or buy-in over the past decade.
This transfer of assets has gone largely unchallenged for several years, according to Van Lanschot Kempen. However, it added that with some pension schemes benefitting from significant surpluses, driven by shifts in Gilt markets over the past two years, there are now “material incentives” for sponsors and trustees to consider running pension schemes on.
Van Lanschot Kempen said that adopting longer-term thinking and allowing schemes to run on, both retains value and offers additional benefits.
Its projections show that running on a £1bn DB scheme could generate surpluses of £250m over the next decade, which could be redeployed to benefit members, trustees, sponsors, and to address intra-generational divides and wider society.
FM+ solution
In response to this value loss, Van Lanschot Kempen has launched a new extended fiduciary management solution to help schemes run on for longer for the benefit of members, trustees, sponsors and wider society, to avoid further “value leakage” from UK pension schemes.
The solution – FM+ – was developed in partnership with C-Suite Pension Strategies and offers similar benefits to fiduciary management but also includes additional third-party security arrangements to provide protection against sponsor defaults and falling funding levels.
This approach, according to Van Lanschot Kempen, shifts the focus from underlying risk concerns to longer-term surplus and benefit generation.
Andre Keijsers, head of UK and head of institutional client management and origination, said: “Pension schemes now have a credible alternative to the more-or-less accepted approach of an insurance exit solution.
“Allowing schemes to run on enables them to protect and lock in value, rather than this being lost in the transfer to the insurance world,” he said.
Keijsers added that surpluses can then be generated and distributed to offer DB members better inflation proofing or give defined contribution (DC) members a better chance of a living pension with contribution top-ups.
Reductions in sponsor contributions can feed through directly into improved company cashflow, Keijsers said, which can additionally be recycled for the benefit of employees or retained in the business to improve shareholder value.
He continued: “This capital could also be invested in line with the government’s Mansion House reforms to stimulate the UK economy and promote wider societal benefits.”
According to Iain Brown, head of strategic clients at Van Lanschot Kempen, while insurance transactions have long been considered the “gold standard” for pension schemes, in transferring assets, schemes have also transferred significant value to insurers and often “lost out substantially” in the process.
He said this value loss has gone “largely unchallenged” for many years. He urged the pensions industry to act now and encourage sponsors and trustees to “seriously consider” continuing to run their pension schemes.
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