DB scheme sponsors set for £50bn boost under proposed Mansion House reforms

The Chancellor’s Mansion House reforms could provide a £50bn boost for defined benefit (DB) pension scheme sponsors, although the new DB Funding Code is unlikely to make a major difference to scheme behaviour, analysis from Barnett Waddingham has found.

The research suggested that the two reforms have a “fundamentally different” perspective on the direction of travel for DB scheme funding, the allocation of capital and investment risk, and are expected to have differing impacts on the industry.

In particular, the firm estimated that, if the Mansion House proposals are agreed, around £50bn of surplus funds would currently be available to be returned to sponsors of FTSE 350 DB schemes.

This is equivalent to around 10 per cent of FTSE 350 DB scheme assets, and is also equivalent to around two-thirds of the total dividends paid in 2022 by the FTSE 350 DB scheme sponsors.

This was based on the assumption that any surplus above 105 per cent funding on The Pensions Regulator’s (TPR) proposed “fast track” low dependency basis would be available to be returned to sponsors.

Although Barnett Waddingham acknowledged that not all schemes will be able to return surplus funds to sponsors in full, with some already in the process of a buyout for instance, it argued that it is clear that the Mansion House reforms could have a profound impact for DB sponsors.

In contrast, the impact of the DB Funding Code is expected to be more minimal, with Barnett Waddingham suggesting that the vastly improved funding position of DB schemes following the increase in bond yields over the last year could call the relevance of the DB Funding Code into question.

Indeed, analysis from Barnett Waddingham suggested that around 80 per cent of the FTSE 350 DB schemes are likely to pass all three of TPR's strict fast track tests as at 30 June 2023, which is substantially higher than TPR’s own assessment that 51 per cent of schemes would pass all three tests as of 31 March 2021.

In addition to this, Barnett Waddingham suggested that others will already be complying with the strict requirements of the code, which are less prudent than the fast track tests, estimating that around 90 per cent of FTSE 350 DB schemes are already broadly compliant with the guidance.

Given this, Barnett Waddingham questioned whether the new code is really needed to change pension scheme behaviour, arguing that much of the new requirements now appear superfluous for the vast majority of schemes.

Barnett Waddingham principal, Mark Tinsley, commented: “Many pension schemes have seen large improvements in their funding positions over the past year and now have significant surplus funds. Sponsors therefore stand to benefit considerably if the rules around returning surplus funds are relaxed, as is being considered under the so called “Mansion House” reforms.

"However, any reforms should ensure that members of pension schemes are not adversely affected, meaning that extra forms of security may also be needed.

“Improvements in scheme funding positions also call into question the benefit of requiring all schemes to target a low dependency funding level, as is separately being planned by the Department for Work and Pensions and to be reflected in a new funding code issued by TPR.

"The vast majority of pension schemes are now already meeting the proposed stricter funding requirements, so the additional costs associated with requiring all schemes to comply with the proposed changes to the funding code may now be difficult to justify.“

Further updates on the DB Funding Code are expected in the autumn, although MPs recently urged the government and TPR to "halt" their existing plans for a new DB funding regime, amid concerns that the proposed approach is not sufficient to allow open schemes to thrive.

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