Zedra has launched a new escrow solution designed for those defined benefit (DB) pension schemes targeting a bulk purchase annuity and with concerns about possible overfunding.

The solution is designed to address the gap for smaller schemes seeking escrow services, and aims to offer a streamlined, cost-effective approach that removes the traditional complexities and high costs associated with escrow arrangements.

With no minimum scheme requirement, the solution is expected to open doors for previously disadvantaged, smaller pension schemes, as their standardised terms are set to "significantly" lower costs, facilitating a smoother entry into the buy-in market for pension schemes.

The launch comes shortly after the reduction of the tax rate on surplus from 35 per cent to 25 per cent, which Zedra Governance client director, Alan Greenlees, said will have been welcomed by many schemes and sponsors who find themselves in a financially strong position, with the prospect of being overfunded and having a surplus at the end of their journey.

However, he argued that schemes should be proactive in planning ahead for this possibility, arguing that "ready-made solutions like escrow can mitigate the risk of having ‘trapped surplus’ and avoid this tax altogether".

The new tool is therefore also intended to act as a solution for those looking to mitigate the risk of trapped surplus, while on the path to securing a bulk purchase annuity with an insurer.

"Risk transfer has been the number one topic in pensions for the last 12 months,” Greenlees continued. "It is very much a sellers' market, and smaller schemes are finding it increasingly difficult to secure favourable deals.

“We are excited to offer a solution that not only eases the funding process for smaller schemes, but also provides substantial cost savings and improved efficiencies."

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