The landscape for defined benefit (DB) pension scheme endgame planning in the UK is shifting. For years, securing a buy-out with an insurer was considered the only viable destination for most DB schemes.
While buy-out remains a legitimate and frequently appropriate route, a wave of regulatory change is beginning to open the door to alternative strategies that do not rely on insurers at all.
Ortec Finance, a provider of technology and solutions for risk and return management, recently delved into DB pension schemes.
Recent regulatory developments are at the heart of this shift, particularly around how schemes can access surplus funds. Changes to UK regulation are set to unlock an estimated £260bn currently held as surplus within DB pension schemes. Under the traditional buy-out route, this surplus is effectively handed over to insurers as part of the transaction. The new rules, however, mean that extracted surplus could instead be returned to members, sponsors, or both — a prospect that has attracted considerable interest from all stakeholders involved.
Alongside surplus extraction allowances, captive insurance frameworks are also gaining renewed attention. Previously regarded as a niche route suited only to a handful of larger schemes, captive structures are now being reconsidered more broadly. Their appeal lies in offering a more secure mechanism for accessing surplus compared to a straightforward run-on arrangement, making them increasingly relevant as schemes explore their options.
For schemes that are not yet fully funded relative to buy-in levels and appear unlikely to close that gap, the range of realistic options may be narrower. However, DB Superfunds present a potential bridging solution for these schemes, offering a pathway that could ultimately still lead to buy-out, without requiring schemes to be fully funded at the outset, Ortec said.
The cumulative effect of these developments is that buy-out is no longer automatically the correct answer for every scheme. Trustees and sponsors must now weigh a broader set of considerations: the potential to access surplus value, the ability to preserve ongoing relationships between trustees, sponsors and members, and the long-term consequences of each route — particularly given the irreversible nature of a buy-in or buy-out once completed.
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