UK DB deficit could be halved with new strategies

The current £500bn UK DB deficit could be halved if pension schemes look beyond traditional methods of creating value, according to research by Hymans Robertson.

In its report, Maximising Value in DB, Hymans Robertson found that if schemes employed a wider range of opportunities to create capital they could reduce the £500bn shortfall to £225bn, which would be easier to eliminate through investment return and contributions.

Hymans Robertson head of corporate DB, Alistair Russell-Smith explained: “Our analysis of the FTSE 350 shows that 5 per cent of companies could transfer their DB scheme to a consolidator and 3 per cent could buy-out with no cash injection.

"A further 17 per cent could transfer to a consolidator and 13 per cent could buy out with less than one month’s earnings. Schemes should review their long term objective in light of these developments. Across UK DB, this reduces the deficit by £100bn.”

Improving value for money in DB pension schemes is becoming increasingly important and recent recommendations in its 21st Century Trusteeship campaign from The Pensions Regulator highlighted this.

Maximising Value in DB found a number of ways to help increase DB scheme value for money and reduce the £500bn deficit, Hymans Robertson head of trustee DB, Susan McIlvogue, said: “Alternative investment strategies are emerging in the DB world, making it possible for schemes to achieve the same investment returns for less upfront capital.

“The increase in popularity and demand for DB to DC pension transfers has already seen around £50bn paid out of DB since their introduction. We’ve seen requests for transfer value quotations treble since 2015 and quadruple the number of transfers being paid out. If this trend was to continue, transfers and other member options could reduce the DB UK deficit by as much as £100bn.

“Value is often associated with reducing running costs but there’s a danger that schemes focus on this area alone. Instead, trustees and sponsors need to look beyond their traditional options and explore a broad spectrum of opportunities to maximise value. If they do this there is with the potential to create £275bn of additional value across UK DB and ultimately halve the deficit.”

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