More FTSE-listed companies look to access pension surpluses

Growing numbers of FTSE-listed companies are looking to unlock pension fund surpluses in an emerging trend that could lead to billions of pounds being returned to employers in the coming years.

Defined-benefit plans — which promise guaranteed retirement payouts to members — were once commonplace in the UK private sector but were replaced by riskier defined-contribution plans, deemed less expensive for employers to run.

Employers with DB plans have traditionally targeted arrangements where they pay an insurer to take over responsibility for pension payments.

But a dramatic improvement in scheme funding positions in recent years is leading more employers to pause buyout plans and instead consider “running on” their scheme to access surplus that has accrued, according to consultants.

“The question of the hour is what schemes are doing with that surplus,” said Matt Tickle, chief investment officer with Barnett Waddingham, who estimates that about £45bn of surplus is sitting in FTSE 350 company pension funds. “For most, buyout via an insurer is still a sound decision — but in a recent survey we found that one-third of schemes are already considering whether running-on is a viable option.”

Driving the rethink is a sharp improvement in funding positions of the just over 5,000 corporate DB pension plans in the UK.  

A significant increase in bond yields since September 2022’s gilt crisis has reduced the value of pension scheme liabilities, more than offsetting a corresponding fall in scheme assets.

About 90 per cent of 5,050 private sector DB pension schemes are in surplus, up from 57 per cent of 5,200 plans in 2021, according to Pension Protection Fund analysis, with an aggregate surplus of roughly £469bn in May this year.

Aon, the global professional services firm with 6,000 staff in the UK, is taking steps to make use of a “substantial” surplus that has built in its DB plan.

With the support of the scheme’s trustees, the company is consulting with staff on changes that would allow the DB surplus to be used to meet contributions costs in its defined contribution retirement plan, potentially amounting to “tens of millions”.

“This does require trustee agreement in most cases but it doesn’t need new legislation,” said John Harvey, partner with Aon. “The immediate benefit is to Aon’s cash flow.”

Harvey added there were no current plans for Aon to use the surplus for anything other than funding the pension bill for the DC scheme. The group’s move comes as the market for insurance buyouts remain strong, with a record £50bn in deals expected to be brokered this year, according to actuarial consultancy LCP.

“At some point we still intend to insure, this isn’t a forever decision,” he said.

XPS, which provides pension advice to FTSE-listed companies, said it had implemented “surplus extraction” for two of its clients at the “larger end of the market”, with the freed cash also used to fund DC pension contributions.

“In one case, the surplus was large enough to fund DC contributions for the next 10 to 15 years,” said Tom Froggett, partner with XPS, adding that surplus extraction was “the hot topic of the moment among trustees and schemes”.

While some employers have made moves to extract surplus, many employers are awaiting further direction from the newly elected Labour government before deciding their position on surplus.

An XPS survey in May this year, representing 300 schemes with £420bn in assets, found 57 per cent of employers would look to run on their schemes to use surplus if the government introduces legislation that allows them to override their existing scheme rules to permit surplus extraction.

“The pensions industry is waiting to see what the next government does,” James Chemirmir, pensions director at Kingfisher told the Financial Times.

“Only then will we know the range of options available as to how future surpluses could be used.”

While surplus extraction may be the subject of more boardroom discussions, running a scheme on would mean that it remained on the employer’s balance sheet.

“Ultimately, any employer that is considering a run-on strategy will need to weigh up the benefits of doing so against the risks,” said Froggett.

“They need to be comfortable that the net position is favourable.”