Pension scheme sponsors have a "once in a lifetime opportunity" to make sure that their defined benefit (DB) scheme is on the right course to be able to “reap rewards” for members and shareholders in the future, LCP has said.

LCP’s report, Seize the moment, noted that there are a variety of endgame options now available and new innovations coming forwards all the time, warning that a strategy that seemed right when set a couple of years ago could be missing out on important new opportunities.

DB funding levels have recently been on the rise, with the latest figures from LCP revealing that, as at the end of September, FTSE 100 balance sheet surplus levels stood at £70 bn, broadly equating to a 120 per cent funding level.

These historic levels have led to a boom in the bulk annuity market, with industry analysis suggesting that 2023 is on track to be the busiest year on record for the de-risking market.

However, LCP argued that while sponsors have previously tended to opt for the de-risking route because they’ve tended to see the scheme as a millstone around their neck, there is now an opportunity to do more for members given these high funding levels, whether that is supporting DC members or offering discretionary increases to DB members.

The firm pointed out that some of the Mansion House reforms could also bring "risks and opportunities for sponsors", clarifying that although the timings are tight, some key changes in the pensions space could be seen before the end of this parliament.

Despite this, the firm emphasised that there are also opportunities independent of any further reforms that might come off the back of the Chancellor’s ‘Mansion House’ agenda that could provide further space for seeing a pension scheme as an asset and not a burden.

However, there are considerations that schemes need to be aware of, as LCP noted that, when it comes to investment, more schemes are now holding a far larger proportion of illiquid assets following the LDI crisis as many schemes needed to reduce their holdings in liquid assets, which could hinder flexibility.

LCP also stressed the need to consider the latest mortality data when it comes to funding and de-risking discussions, predicting that sponsors are likely to continue to see reduced liabilities coming through for funding and accounting due to mortality assumptions over the coming year.

Indeed, according to LCP, 2023 data so far showed 4-6 per cent higher mortality than 2019, with early estimates suggesting that the CMI 2023 tables expected to be released in Q1-Q2 2024 could lead to a further 1-2 per cent reduction in liabilities.

LCP partner and author of the report, Gordon Watchorn, stated: “An intense focus on protecting against what could go wrong means there has been little consideration of the likelihood or consequences of what could happen and how things could improve for all when things go right.

"In this environment of unprecedented funding levels when there are now more options for sponsors, it’s time to be more innovative and bold and to keep the strategy under constant review.”

LCP partner, Steve Webb, added: “With so many other issues competing for the time and attention of business leaders, a relatively mature DB scheme can easily slip down the priority list. But our message is both urgent and optimistic. There is a once in a lifetime opportunity now and time devoted to making sure your scheme is on the right course could reap rich rewards in years to come.”

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