With trillions of pounds in defined benefit (DB) pension assets expected to transfer to insurers in the coming years, FTSE 350 firms could miss out on billions in surplus value if they buy out too early, according to analysis from Barnett Waddingham (BW).

The findings, outlined in BW’s latest report ‘FTSE 350 pensions: assessing the value of DB scheme run-on’, revealed that if each scheme adopted an optimal endgame strategy, the total surplus available to FTSE 350 companies could rise from around £17bn to £20bn, delivering an additional £3bn to shareholders compared to continuing with current buyout plans.

Against the backdrop of the 2025 Pension Schemes Bill, the government proposes allowing all schemes to access surplus on an ongoing basis, without first securing a full insurance buyout, provided they meet a new, lower funding threshold.

Under this change, BW estimated that FTSE 350 companies could unlock up to £38bn more in surplus than under current rules, increasing the accessible total from £29bn at a buyout level to £67bn at a low-dependency level.

However, BW warned that many firms could risk missing out on additional value if they choose to access scheme surpluses too soon.

It found that while surplus access at the low dependency funding level could unlock
significant value, most FTSE 350 firms would benefit more by running their schemes beyond a buyout funding level.

Indeed, BW stated that only a third (33 per cent) of schemes would see the greatest value from a buyout as soon as it becomes affordable.

For the remaining 67 per cent of firms, the financial case is stronger for running on their DB schemes rather than buying out as soon as it becomes affordable, BW noted.

It found that, on average, the optimal run-on period for this group is around 10 years, with larger schemes benefiting from a longer timeframe.

BW stressed that failing to take this approach could mean missing out on material additional value, adding that for around 10 per cent of companies, this potential surplus is equivalent to more than 5 per cent of their market capitalisation.

Therefore, BW has urged trustees to consider whether releasing a surplus is in the interests of members.

They will also need to assess the strength of employer covenants, ensure adequate safeguards are in place, and consider whether a share of surplus should be allocated to members to reflect any increased risk, the firm added.

BW partner, Lewys Curteis, said the findings marked a “significant shift” in how FTSE 350 firms could soon view their DB pension schemes.

“Once the financial skeletons in the closet, they are fast becoming ‘hidden treasure’; with financially material surpluses able to support growth, improve balance sheets and cashflow and even mitigate the cost of the scheme,” he continued.

Curteis explained that while the government’s proposals to free up pension assets through the Pension Schemes Bill were “welcome,” they added an extra dimension of complexity to endgame planning.

“Not only do sponsors and schemes need a plan for how to close deficits, they now need to reconsider what they do when they achieve full buyout funding," he emphasised.

“For the majority of schemes, holding their nerve by delaying buyout for just a few years could be worth billions.

“Sponsors and trustees will only get one shot at buyout - and doing it too early could mean walking away from serious long-term value,” he warned.

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