Hundreds of small defined benefit (DB) pension schemes may be unaware that they are within ‘cheque-writing distance’ to buyout, according to K3 Advisory.

The bulk annuity and consolidator advisory firm said there were potentially hundreds of small schemes that may not realise they are close to being able to afford to buy out their scheme liabilities and called on trustees to take action.

It pointed to data from the Pension Protection Fund (PPF), which showed that 26 per cent of schemes with fewer than 99 members were estimated to be between 75 per cent and 100 per cent funded on a buyout basis.

K3 Advisory partner and head of buy-in to buyout services, Andrea Mendham, said the figures were unlike anything the firm had seen before in terms of funding positions for small schemes.

“It provides an opportunity that many could not have foreseen to secure member benefits and take the scheme off the sponsoring company’s balance sheet,” she continued.

“However, many of the trustees of these schemes are completely oblivious to how close to being fully funded on buyout they are.”

Mendham stated that estimates from scheme actuaries on buyout funding levels are “guess work” and, while these estimates are undertaken with due diligence, the reality was that they can be “way off” the actual buyout price.

“We have seen live insurer pricing differ from scheme actuary estimates by up to 10 per cent either way, which can mean that trustees may subsequently miss out on opportunities to provide full member security,” Mendham said.

“What scheme trustees may not realise is there is absolutely nothing stopping them from obtaining an indicative premium from an insurer. There is no obligation to move forward with the quote received but, what they will have, is a far more accurate representation of the scheme position.

“Even if not quite fully funded on a buyout basis, we have seen this information help many trustees have helpful conversations with the sponsor as this gives them an accurate view of the amount of top up needed to secure that buyout position.

“Most sponsors of DB pension schemes, especially small ones, will want the scheme off the balance sheet as soon as possible and may be willing to provide an immediate top up to enable this to happen.”

However, Mendham noted that there were “conflicts at play” and it will not always be in a provider’s commercial interest to encourage schemes to explore buyout as an option.

“Trustees must assume responsibility for understanding the progress towards their long-term objective, which for many schemes will be buyout,” she concluded.

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