DB pension scheme sponsors can seize new opportunities in today’s shifting landscape – LCP
Pensions & benefits DB corporate consulting Corporate strategy DB pensions
LCP is encouraging DB pension scheme sponsors to be proactive and take advantage of new opportunities, as highlighted in its latest Autumn corporate report. The report reveals better endgame options for schemes and new possibilities under the Funding Code.
For the fourth consecutive year, UK pension schemes of FTSE100 companies have maintained strong accounting surpluses, as reported in our annual Accounting for Pensions report. Additionally, at the end of September 2024, LCP Pensions Explorer estimated this was around £60bn, representing a funding level of approximately 120%.
This positive financial trajectory offers sponsors more endgame strategies. Increasingly, sponsors and their trustees are exploring alternatives to traditional buyouts, such as superfunds or capital-backed journey plans. Running-on for a period to extract value from surplus is also gaining popularity, with over half of schemes above £500 million now targeting this rather than choosing to buy out at the earliest opportunity.
The report highlights new opportunities for sponsors under the latest DB Funding Code. Sponsors are now required to agree on a funding and investment strategy with their trustees, allowing them to share their thinking and create a plan that benefits both sponsors and members. The Code also places greater emphasis on the strength of the sponsor covenant, giving more flexibility to schemes backed by strong sponsors. The report details various strategies sponsors can use to reassure trustees and regulators about the security of their pension commitments.
However, alongside these opportunities, the report acknowledges the risks that sponsors must navigate in today’s regulatory and economic environment. While double-digit inflation posed a challenge in recent years, the current concern has shifted to deflation. LCP advises sponsors to stay prepared and adaptable to these economic changes.
Additionally, the report addresses the growing threat of cyber risks. While new technologies can enhance member engagement and streamline operations, they also increase the vulnerability to cyber attacks. LCP emphasises the importance of sponsors and trustees working together to create robust cyber response strategies to protect scheme members.
Phil Cuddeford, LCP Partner and Lead Author said: “DB pension scheme sponsors should continue to shift their mindset from viewing challenges as obstacles to seeing where the new opportunities lie. With the regulatory and economic landscape constantly evolving, it’s essential to focus on emerging opportunities and take advantage of options that simply didn’t exist a few years ago.”
Steve Webb, LCP Partner and former UK Pensions Minister, added: “Risks are evolving in many forms, from cyber threats to geopolitical uncertainties. Now, more than ever, it’s crucial for corporate sponsors to reassess their strategies and work closely with trustees to address and manage these risks effectively.”