Understanding the economics: Examining the financial case for running on a DB pension scheme beyond buy-out affordability
Pensions & benefits Endgame strategy and journey planning DB pensions DB surplus reform Pension Schemes Bill
For many years, funding Defined Benefit pension schemes was a challenge for many sponsor companies. However, a dramatic turnaround in scheme funding has radically changed the situation.
The latest Government figures show that the UK’s £1.2 trillion of DB schemes now hold approximately £160 billion in collective surpluses relative to the amount required to meet member benefits, even on a ‘low dependency’ basis.
This LCP On Point paper takes a dispassionate step back to look at the economics of a well-funded DB pension scheme today.
The analysis shows that the economic value of a long-term run-on could be substantial. For example, a £1bn scheme running on for over 20 years is expected to have a positive value ranging from £100m to £250m, depending on the investment approach. This demonstrates the potential for well-managed DB schemes to significantly benefit both their sponsors and members, in the right circumstances where the sponsor can carry the downside risk.
