Defined benefit (DB) pension schemes have the opportunity to generate a surplus of up to £1.2trn over the next 10 years, according to research from Van Lanschot Kempen (VLK).

The analysis looked at the potential future trends for the buyout surplus in the DB market, revealing that, in the median base case, there is an opportunity to generate a surplus of around £0.5trn over the next 10 years.

An extremely optimistic scenario, meanwhile, could bring an opportunity to generate a surplus of up to £1.2trn over 10 years.

And the report found that there is still "great potential" to generate a large amount of surplus within even after allowing for a continuation in significant buyout activity of £50bn per year, although this opportunity is “overwhelmingly anchored” by larger schemes (£500m+).

VLK's report also highlighted the broader potential benefits of remaining invested in return seeking growth assets, rather than choosing to target buyout immediately, including greater scope to invest in productive assets.

In addition to this, it said that trustees and sponsors can avoid having to incur the various costs associated with a buyout transaction, such as the sponsoring employer making up any shortfall between the scheme assets and buyout price and trustees not having to incur the numerous advisory costs.

Commenting on the findings, VLK head of client advice UK, Arif Saad, said: “Despite the sizeable improvement in scheme funding positions across the UK DB pensions market, many schemes are likely to encounter difficulties securing benefits with an insurer due to capacity constraints across the bulk annuity market as a result of greater demand.

“A number of critical developments will prompt trustees and sponsors to consider alternative endgame options.

“Schemes that find themselves in this position might consider running on, by maintaining a suitable level of risk, but generating a return that will build up a funding surplus within the scheme.

“Furthermore, the development of legislation that focuses on expanding the way scheme surpluses can be accessed will be enticing to both trustees and sponsors alike, who may be interested in the prospect of enhancing member benefits, be that defined contribution or DB members or extracting surplus after decades of deficit contributions."

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