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Pension scheme run-on

Regulations and the pensions market are changing, with the latest DWP consultation on options for DB schemes promising further changes to support schemes looking to invest for growth.

Now is the right time to embrace the opportunities, so that members benefit from improved experiences and outcomes, and pension schemes become an asset for sponsors and society.

Here we share some key resources and our strategic run-on framework, Elevate.

Elevate: A flexible, active run-on strategy framework helping our clients turn DB pension schemes into real assets

Elevate is our flexible pension scheme run-on framework designed to help turn DB pension schemes into an asset and generate value.

Elevate brings together our unique blend of expertise and strong industry position so that pension schemes identify and implement a robust run-on strategy, balancing risk and enhancing value.

This run-on strategy can involve using surplus assets to improve benefits for members, help sponsors meet ongoing DB and DC pension costs, or as a bridge to buy-out over the medium to long term.

A £1bn scheme could expect £100m-£150m released over 10 years
which could be used for:

  • DC contributions

  • Enhance DB scheme benefits

  • Refund to employer

  • Fund alternative benefits

  • Long-term investments

  • Risk buffer

How we work together to determine the optimal strategy for each client’s specific situation

Case study

How one client used Elevate to fund DC contributions

LCP advised the sponsor of a UK DB pension plan with assets of c£2bn. The Trustees were initially focussed on insurance.

With the insight from LCP’s market-leading risk transfer team and unique longevity expertise, we were able to:

  • Refine the estimate of the cost to insure the Scheme
  • Recommend data and benefit actions to improve pricing.
  • Help the Trustees and sponsor make informed decisions on the value-for-money of insurance buy-ins compared to retaining the risk as part of a value creation run-on strategy.

The Trustee advised that the recommended data and benefit preparatory work could take up to four years. LCP analysis showed that:

  • the surplus is expected to grow by c.£40m pa over this period (after allowing for risk management steps)
  • some of this emerging surplus could be extracted whilst still leaving a significant risk buffer.

The Elevate framework meant we could establish and implement a tax efficient route to access the surplus with immediate cashflow benefits for the sponsor and a risk buffer for member protection.

Related services

Endgame strategy and journey planning

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Pension risk transfer

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GEARS: Our strategic journey planning framework

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FAQs

DB pension scheme run-on is where you continue to operate a pension scheme beyond the funding level required to fully insure and buy-out pension benefits.

There are many reasons why a scheme may choose to not move to buy-out as soon as it can afford to do so. These include:

  • Potential upside for members: In a buy-out, benefits are locked in as part of a transaction removing the potential for future discretionary increases that are not insured. Any surplus generated by running the scheme on could be used to improve benefits for members.
  • Potential upside for sponsors: Sponsors may prefer to retain both upside and risk, rather than pay away the potential surplus to an insurer. Possible benefits include cash savings by using the surplus to meet ongoing pension costs for current employees or refunds to support growth.
  • Control: Trustees and sponsors may have concerns around relinquishing control of the scheme. This includes passing the administration and ongoing communications to a third party where they have no influence on standards or level of member experience.

Key risks of run-on include:

  • Covenant: Conditions may change meaning the scheme sponsor becomes unable to support the scheme
  • Longevity: Pension scheme members may live longer than expected leading to an increase in pension payments
  • Investment: asset returns may be lower than anticipated
  • Regulatory: new policy and legal decisions could impact how schemes need to be run and the benefits that need to be paid

How to best manage risk without removing the upside is a key consideration when building a run-on framework. Elevate brings together our unparalleled expertise, experience and regulatory insight to help manage these risks such that security of member benefits is maintained whilst also creating value to support the pension scheme’s and sponsor’s objectives.

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