Listed firms could ‘miss out on £125bn’ by handing over pension funds to insurers
A major pension scheme adviser has calculated that listed firms with defined benefit pension funds could miss out on £125bn by making increasingly popular buy-out or buy-in deals with insurers.
Barnett Waddingham said employers should consider running on these traditional schemes rather than handing them over to insurers, given that funding levels have improved so much.
It calculated £125bn in lost value based on the scenario that insurers took on all schemes currently sponsored by FTSE 100 and FTSE 250 firms at prevailing market prices for pension risk transfer (PRT) deals.
“If instead, this were shared over time between members and sponsors then it could be a boon for UK PLC, the taxman and workers alike,” Lewys Curteis, a principal of BW, told The Times.
PRT deals involve buying up pension liabilities from corporate pension schemes and are booming in popularity among insurance giants like Legal & General, Aviva and Phoenix. M&G has also recently re-entered the market.
The majority of employees are now in defined contribution schemes, which are based on how much they pay in. As a result, many employers are keen to offload legacy schemes that few benefit from.
Still, BW said that rising bond yields have boosted funding levels over the past three years, with around 35 per cent of the FTSE 100 and FTSE 250’s schemes being fully funded on a buy-out basis as of 31 May.
Curteis said this improvement was so notable that employers risked needlessly handing over billions of pounds that could be used for shareholder returns or to sweeten pension pots.
“We would encourage companies and trustees to properly assess the benefits that could be obtained from a run-on strategy before making the irreversible decision to transfer to the insurance market,” he said.
Curteis added that firms were already looking at running on their schemes and some had even chosen to defer going to an insurance company.
New measures from the Conservative government came into force in April that cut the tax on surpluses extracted from defined benefit schemes to 25 per cent from 35 per cent, in a bid to make the run-on option more attractive.