DB schemes have been on a long-term journey towards full funding, with sponsoring companies contributing hundreds of billions of pounds to repair pension scheme deficits across the past two decades. As at 31 March 2024, the PPF estimates that total DB assets were c.£1.2 trillion and over a third of schemes (by value) were in surplus on a buyout basis.
The chart below shows the evolution of the total value of DB assets compared to the total cost of UK DB schemes entering the Pension Protection Fund (Total PPF Liabilities) and the total cost of all UK DB schemes insuring liabilities. Having spent many years seeking to improve funding levels, the surge in bond yields since 2022 has accelerated this progress as liability values have fallen more than asset values.
This has meant that many schemes find themselves better funded than ever before, as indicated by the yellow dots on the chart showing increasing funding levels on a buyout basis. Consequently, the average DB scheme now holds assets that could already be sufficient to meet their long-term liabilities of paying all members’ pensions in full as they fall due.
Click here to read the current market conditions report.
Source: The Purple Book 2024, PPF7800 Index as at 30 November 2024, including restated data from 31 March 2023 to reflect revised calculation methodology.
please supply links for 3 endgame options
Distribution of buyout funding levels
According to the Purple Book 2024, just over a third of DB pension scheme assets are above 100% funding on a buyout basis, as shown in the chart below, corresponding to c.£413bn of assets. This brings to life the potential immediate demand for PRT from UK DB schemes.
The distribution of buyout funding levels is not even, with larger schemes tending to have higher funding levels on average than smaller schemes
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Over the past six months, this overall dynamic has remained largely unchanged
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Dave Corbett
Director of Marketing PRT UK
Source: The Purple Book 2024, L&G analysis, as at 31 March 2024.
Buyout, run-on or both?
We’ll help you build a bridge to your endgame
Over the coming decade, trustees representing millions of UK pension scheme members will implement plans to manage their defined benefit (DB) pension schemes for their chosen endgame.
Not only have funding levelsrisen, but the wider pensions landscape is changing too. These changes have resulted both in soaring demand for pension buyouts, and increasing interest in investment strategies that help trustees to continue running on their schemes either indefinitely or for a period prior to securing their members’ benefits with an insurer. In industry parlance, these scenarios are referred to as pension scheme endgames.
As the UK’s largest manager of DB pension assets and the largest and longest serving provider of Pension Risk Transfer (PRT) solutions (buy-ins and buyouts), L&G is well positioned to support trustees and sponsoring companies with their endgame journey. In our inaugural Endgame Insights report we aim to provide a comprehensive overview of the latest market conditions and evolving solutions-focus from both an investment and insurance perspective.
What an optimal ‘endgame’ looks like varies from scheme to scheme. Buyout remains attractive for schemes seeking enhanced security, while the government’s 2024 consultation on surplus extraction looks set to increase choice and flexibility even further.
In short, we see three main endgame options for schemes listed below.
“Not only have funding levels risen, but the wider pensions landscape is changing too.”
Click here to read the current market conditions report.
Endgame options
please supply links for 3 endgame options
Buyout
Schemes wishing to ‘lock in’ their strong funding positions by progressing towards buyout with an insurer to ensure full security of their pension scheme and its members. The goal here is to guarantee the security of members' pensions, irrespective of market volatility, and remove future scheme running expenses.
please choose 1 link for each of these paragraphs. Either the relevant pages buyoout, run-on, both or the prt in focus page. links on the sub-titles won't work as they are in bold already for being a subtitle.
Run-on
Some trustees may want to ‘run on’ their scheme in perpetuity i.e. remain invested and focussed on paying pensions until the final member benefit is paid. These schemes may be seeking to extract a surplus that could be returned to the sponsoring company and potentially used to offer additional discretionary benefits to DB members, or to fund the company’s defined contribution (DC) pension scheme. Click here to learn more.
Both
A significant group of well-funded schemes are keen to stay invested now (and potentially target a surplus), while keeping the ultimate security of buyout in mind over a longer-term horizon. These schemes are seeking to have the ‘best of both’ endgame destinations. Click here to learn more.
Offering you the combined expertise of a UK market leader Legal & General is both UK’s largest manager of DB pensions1 and a leading provider of Pension Risk Transfer (PRT).
Offering you the combined expertise of a UK market leader.
For more detail on investment strategies and endgame options please read our article below.
The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested.
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