Taking surplus from a defined benefit (DB) pension scheme doesn’t mean a buyout is “off the table,” according to Legal and General managing director of strategic accounts and new markets, Chris DeMarco.

Speaking to Pensions Age, DeMarco said the introduction of the debate around surplus and how to use it would “open up” new possibilities for DB schemes in deciding how to manage schemes in surplus.

However, he said he thinks that “buyout will remain the gold standard and the majority of schemes will buyout at some point”.

“I'm not sure that corporate finance directors having put money into pension schemes via contributions over the past 20 years would suddenly decide, especially as now DB schemes are largely closed and no longer relate to current employees, that running on is necessarily in the best interest of the corporate sponsor,” he said.

But he also clarified that “to take the surplus doesn't mean that the buyout is off the table”.

Instead, he suggested: “It may mean that schemes need to structure exactly how they take the surplus, whether that's contributed to defined contribution (DC) members."

The government previously published its response to the consultation on options for DB schemes, in which it said it would introduce a statutory resolution power for scheme trustees to modify their scheme rules in order to access the scheme surplus.

DeMarco also noted the increased entrants into the insurer market, suggesting that with the current 11 participants “the market will likely see continued keen competition around pricing”.

“I think this will continue to be a big market for many years to come, for probably five to 10 years," he added.

But he said it remains to be “determined” on the amount of “increased competition” in the market from these new entrants, as he indicates that they are at the smaller end of the market.

This, he noted, is “not surprising” as he explained that these new entrants need to develop credibility with the trustees who are the ultimate decision makers.

“Whilst some of the new entrants have a very strong proposition, trustees tend to be quite paternalistic and care for the outcomes of members,” DeMarco said.

“So, they'll want some proof of evidence that the institutions can look after their members, not only from a financial security perspective but also from an advised service perspective. Especially as schemes get into surplus, non-price factors come to the fore.”

He went on to explain that normally a new entrant would win business by being particularly aggressive on price, but said that if the scheme is in surplus, “it's quite less sensitive to price. They don't throw away value, but other factors will come into play.”

In terms of these other non-price factors, Demarco said that customer service experience is being considered which called this “hugely important”, as well as contractual terms, which he said were “quite important”.

He also said: “Laterally, there's been a great interest in how insurers are investing with regard to sustainability, because trustees were required or have been required to look after the sustainability of the portfolio of investments.

“The trustees then hand the money to an insurance company and the members say, well, what's happening? How’s my pension being invested? They feel quite beholden to do that. So, environmental, social and governance (ESG) credentials are coming to the fore.”

This consideration of non-price factors was echoed by LCP earlier this week in a poll, which found a particular emphasis on member experience.

The poll found that almost a third (36 per cent) of schemes said if pricing is equal, member experience would be the deciding factor between choosing between a new market entrant and an established provider.

However, less than one in 10 (8 per cent) of those polled said that they felt well-informed about the differences between providers, while around 25 per cent thought or had assumed the providers all had very similar offerings.

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