Chief financial officers (CFOs) responsible for defined benefit (DB) pension schemes have been encouraged to consider the potential value DB schemes could hold, after analysis from LCP showed that the economic value of a long-term run-on could be "substantial".

LCP's latest report looked at the financial case for running on a DB pension scheme beyond buyout affordability, revealing that a £1bn scheme running for over 20 years is expected to have a positive value ranging from £100m to £250m, depending on the investment approach.

The firm highlighted this as a demonstration of the potential for well-managed DB schemes to significantly benefit both their sponsors and members, in the right circumstances where the sponsor can carry the downside risk.

While the report acknowledged that the challenge of funding DB schemes was historically a ‘millstone around the necks’ of many sponsor companies, it pointed out there has been a dramatic turnaround in scheme funding, which has radically changed the situation.

Indeed, the latest government figures showed that the UK’s £1.2trn of DB schemes as having approximately £160bn in collective surpluses relative to the amount needed to meet member benefits, even on a ‘low dependency’ basis.

And importantly, these surpluses are far more robust than in the past, with better protection against changes in interest rates, inflation and lower investment risk.

Given this, and changes to DB surplus rules included in the draft 2025 Pensions Schemes Bill, LCP suggested that these £160bn of paper surpluses could turn into real value for members, sponsors and through that the UK economy.

However, it warned that some caution is needed, pointing out that higher-returning investment strategies are a key lever for increasing value, but stakeholders may need to be prepared to ‘ride out’ market volatility or pay contributions in adverse scenarios.

In particular, LCP's analysis showed that maintaining a modest allocation to growth assets is likely to be ‘worth it’ in most situations, but additional protections for members may be needed if more risk is taken.

For smaller schemes, the value will be lower, and fixed costs will be proportionately higher.

LCP therefore suggested that a run-on approach may be less relevant for schemes below £100m, with schemes upwards of £200m in size encouraged to consider what the analysis could look like for them to help inform decision-making.

LCP partner, Steve Hodder, said: “For many years, the challenges of funding a Defined Benefit pension scheme have kept the nation’s Finance Directors awake at night.

"But FDs now have real food for thought – could surplus sharing arrangements with trustees lead to a “DB curse” becoming a “DB blessing”?

“The paradigm shift is that the typical DB scheme is no longer underfunded and invested in risky assets, and so the chances of positive outcomes are much improved. Of course, risks remain, but our analysis suggests that most well-funded schemes are much more likely to be an asset than a liability over the long term.

“Whilst the most appropriate strategy will differ from case to case, the option of running on a well-funded scheme for the benefit of members and sponsors deserves to be high on the list of options to consider.”

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