Why is early planning and covenant assessment important under the new DB funding regime?

The new regime places greater emphasis on covenant strength and affordability tests, potentially requiring more detailed information and analysis. Starting early helps trustees and sponsors apply the right tests, plan efficiently, and keep the valuation process proportionate.

Why is stewardship important for pension trustees and institutional investors?

Stewardship is important because it helps long-term investors manage financially material risks and opportunities across their portfolios. For UK pension trustees, it is also part of a wider governance and reporting requirements. For other institutional investors, effective stewardship can strengthen manager oversight, support better ownership practices and help address systemic risks that may affect long-term returns.

Why is the UK government reforming rules around DB pension surpluses?

The Government is moving forward with ideas about the better use of £1.4 trillion of assets held by DB schemes to stimulate economic growth. By reforming the rules, the government intends to allow these funds to be invested in the wider economy, benefiting both businesses and pension scheme members. Learn more

Why might a pension scheme wind-up occur?

A pension scheme wind-up may occur for various reasons, such as the sponsoring employer choosing to close the scheme or being unable to financially support it. Many defined benefit schemes are now closed to new members and have stopped building up new benefits. For lots of these schemes, increasing interest rates in recent years have significantly improved funding levels, and made it more affordable to secure insurance for all members’ benefits and wind-up the scheme.

Why perform insurer due diligence if the PRA already regulates insurers?

The Prudential Regulation Authority (PRA) plays a crucial role in overseeing insurers and ensuring their financial stability. However, our advice adds value to our clients in two key ways: Enhanced understanding: By providing trustees with a deeper understanding of how insurers operate. Each insurer runs a unique business model. Our insurer financial risk reviews help trustees differentiate between these models, particularly in terms of risk exposure, solvency approaches, and capital strategies. This understanding is crucial for informed decision-making. Due diligence expectations: Trustees are placing significant sums of members’ assets - often hundreds of millions of pounds - with an insurer. Members would expect trustees to undertake at least basic due diligence to ensure confidence in their choice. Our advice helps trustees demonstrate that they have taken appropriate steps to evaluate the insurer’s financial position.

Why would a DB scheme choose to run-on?

There are many reasons why a scheme may or may not choose to move to buy-out once it can afford to do so. This includes: Upside for members: Benefits are locked in as part of a transaction removing the potential for future discretionary increases. Running the scheme on to generate surplus could lead to improved benefits for members. Upside for sponsors: Sponsors may prefer to retain 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.

Will CDC pensions give me a better retirement income than DC?

LCP modelling suggests CDC pensions could deliver up to 50% higher income compared to traditional annuities and 15-25% more than high-conviction DC drawdown strategies.

Pensions and benefits

Your questions answered

Explore answers to commonly asked questions about pensions.

Curious? Your questions answered

: The new regime places greater emphasis on covenant strength and affordability tests, potentially requiring more detailed information and analysis. Starting early helps trustees and sponsors apply the right tests, plan efficiently, and keep the valuation process proportionate.

: Stewardship is important because it helps long-term investors manage financially material risks and opportunities across their portfolios. For UK pension trustees, it is also part of a wider governance and reporting requirements. For other institutional investors, effective stewardship can strengthen manager oversight, support better ownership practices and help address systemic risks that may affect long-term returns.

: The Government is moving forward with ideas about the better use of £1.4 trillion of assets held by DB schemes to stimulate economic growth. By reforming the rules, the government intends to allow these funds to be invested in the wider economy, benefiting both businesses and pension scheme members. Learn more

: A pension scheme wind-up may occur for various reasons, such as the sponsoring employer choosing to close the scheme or being unable to financially support it. Many defined benefit schemes are now closed to new members and have stopped building up new benefits. For lots of these schemes, increasing interest rates in recent years have significantly improved funding levels, and made it more affordable to secure insurance for all members’ benefits and wind-up the scheme.

The Prudential Regulation Authority (PRA) plays a crucial role in overseeing insurers and ensuring their financial stability. However, our advice adds value to our clients in two key ways:

Enhanced understanding: By providing trustees with a deeper understanding of how insurers operate. Each insurer runs a unique business model. Our insurer financial risk reviews help trustees differentiate between these models, particularly in terms of risk exposure, solvency approaches, and capital strategies. This understanding is crucial for informed decision-making.
Due diligence expectations: Trustees are placing significant sums of members’ assets - often hundreds of millions of pounds - with an insurer. Members would expect trustees to undertake at least basic due diligence to ensure confidence in their choice. Our advice helps trustees demonstrate that they have taken appropriate steps to evaluate the insurer’s financial position.

There are many reasons why a scheme may or may not choose to move to buy-out once it can afford to do so. This includes:

Upside for members: Benefits are locked in as part of a transaction removing the potential for future discretionary increases. Running the scheme on to generate surplus could lead to improved benefits for members.
Upside for sponsors: Sponsors may prefer to retain 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.

: LCP modelling suggests CDC pensions could deliver up to 50% higher income compared to traditional annuities and 15-25% more than high-conviction DC drawdown strategies.