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Proactivity needed from employers with DB Schemes to avoid trapped surplus

22 May 2024

Employers with Defined Benefit (DB) pension schemes focusing on insurance buy-out, must become more proactive to avoid the risk of trapped surplus, warns Hymans Robertson, as the firm releases the latest update to their 2024 Corporate Valuation series.  Improved funding levels, following on from an unprecedented rise in yields, present an opportunity for DB schemes. However, many do not have appropriate plans in place to ensure efficient use of any emerging surplus, which leads to “trapped surplus”.  

The leading pensions and financial services consultancy highlights the number of key areas which should be reviewed and could be utilised to remove trapped surplus risk. These include escrow arrangements, contribution mechanisms and the funding of future service contributions. The DWP consultation on DB pension scheme surpluses could further bring significant change that benefits both members and employers. It's likely that any changes will take time to implement which highlights the importance of employer proactivity to ensure they have maximum flexibility. For employers with a 2024 valuation approaching, this presents a natural opportunity to address these key areas with their trustees. 

Commenting on the need for employers with DB pensions schemes to be proactive when considering the 2024 valuation negotiations, Sachin Patel, Senior Actuarial Consultant, Hymans Robertson, says:

“In isolation, improved funding levels are great news for DB pension schemes and even better news for members. However, with many sponsoring employers having paid deficit contributions for years, they may not have the appropriate plans in place to take advantage of a surprise emerging surplus.

“For those schemes where the employer’s long-term objective is to target a run-on strategy, the idea of a trapped surplus is less likely to be an issue. However, for those targeting an insurance buy-out, and are reasonably close to reaching this, a 2024 valuation discussion is a welcome moment of reflection, particularly when viewed in tandem with the potential forthcoming legislative changes signposted by the DWP.

“We would urge employers with DB schemes and 2024 valuations to review their surplus framework as part of their negotiations. In our experience trustees are supportive of these discussions and recognise that the risk of trapped surplus. If this is not managed it could lead to unhelpful sponsor thinking and decision making. It is in everyone’s interests to solve this issue.”

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