Defined benefit (DB) scheme sponsors and trustees are willing to work collaboratively on run on for surplus if the government’s proposal for surplus extraction is enacted, but disagree on the level of protection that should be introduced, a study from XPS Pensions Group has shown.

The government is consulting on proposals to allow DB schemes to run on as closed schemes and extract surplus to free up cash to be used by sponsoring employers.

More than half (57 per cent) of DB scheme sponsors would seek to run on their scheme for surplus if the government’s proposal was introduced.

Meanwhile, three quarters (75 per cent) of trustees surveyed said that they would be willing to manage and govern a scheme that runs on for surplus, despite “the perception” that trustees may not see this as being in line with their duties, XPS noted.

While sponsors and trustees appeared to show willingness to run schemes on collaboratively, they had differing views on the protections that would need to be put in place.

Less than three quarters (74 per cent) of trustees felt that any new power to distribute surpluses should need to be agreed between trustees and sponsors, compared to 93 per cent of employers.

Furthermore, while 61 per cent of trustees said that a buffer above buyout funding should be maintained if any surplus is extracted on an ongoing basis, this view was only shared by 30 per cent of sponsors, with 47 per cent of employers believing that a buffer above low dependency would be adequate.

Nearly two-thirds (63 per cent) of employers believed that a low-risk, low-volatility investment strategy was important in running on for surplus, compared to just 45 per cent of trustees.

Meanwhile, 40 per cent of sponsors felt having a strong employer covenant was important, compared to 61 per cent of trustees.

“There is a clear steer that sponsors support being able to extract surplus below buyout but critically would want to adopt a low-risk investment strategy to manage the risk of deficits emerging,” commented XPS Pensions Group partner, Wayne Segers.

“This reflects our view that when running a scheme on it is important to ensure a stable predictable flow of surplus. This allows a degree of certainty of being able to improve member benefits and deliver some value to the sponsor.”

Sponsors and trustees also disagreed on how the surplus should be used, with 24 per cent of trustees believing the majority or all of any surplus should be refunded to the sponsor, compared to 60 per cent of employers.

Nearly half (46 per cent) of trustees felt that surpluses should first be used to provide an agreed level of benefit improvement to members, with the rest being refunded to the sponsor.

While 77 per cent of sponsors said there should be no restrictions on how an employer uses the share of surplus refunded to it, this view was shared by only 53 per cent of trustees.

More than three quarters (77 per cent) of trustees stated that regulatory guidance or a new code of practice, or both, were needed to support trustees running on for surplus, with Segers saying he was “encouraged that the government has taken forward this idea in their proposals”.

Less than half (41 per cent) of trustees felt that having the Pension Protection Fund (PPF) cover all benefits would help support then when running on for surplus, while 33 per cent of sponsors felt that having full PPF cover would make them more likely to seek to run their scheme on for surplus.

“The survey reflects what we are now seeing in the industry,” Segers stated.

“Trustees and employers are standing back and together objectively exploring what the right future strategy is for their DB scheme and members.

“While most trustees and sponsors are open to exploring the option of running on, that has to be where it is right for their members and where the downside risks to the sponsor can be safely managed and are proportionate to any upside.

“We still see the majority of schemes decide insurance is the right destination, but more and more are choosing to run on.”

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