Best to Keep your DB Triple Lock of Sponsor, Ring-fenced Assets and PPF

T rustees are expected to make “informed decisions” by Government.  They have to ask “relevant questions” to meet their fiduciary duty.  A comparison of run-on and buyout is required by FRC’s TAS300V2.1.  Risk-reward calculations are required by TPR regulations.

The maths counts for well funded schemes with sound sponsors.  Being neutral between run-on and buyout no longer seems tenable.  To be noted:

• The risk to benefits is remote.  The combined risk of an investment grade sponsor collapsing and its pension scheme becoming underfunded is lower than the 1 in 200 one year value at risk expected for a superfund or a life insurer’s capital.
• PPF cover is high and rising.  The amount at risk to pensioners not covered by PPF is low and remote.  The risk is inflation between 2.5% and scheme rules increases. (NB pre-1997 service is now indexed up to 2.5%)
• Total payment downside can be eliminated by discretionary payments / pension increases.  A 5.5% increase now to a pension covers inflation up to 3.5% if scheme joins PPF in year 10 (see C-Suite’s Step Up / At Risk Calculator).
• Upside from discretion now encouraged and facilitated through surplus use allowed by Pension Schemes Act 2026 and by new Authorised Payment tax rules for individuals published July 2026 and in place from April 2027.

Perspectives of trustees of best interests of members need to switch from the downside alone to the upside.  Trustees should expect to add payments / have increases to re-establish the pre-inflation cap expectation of protecting the real value of a pension.

Care with BPA’s is needed.  They may not be “certain”.  They could actually add new risks:

• Some life insurers and their reinsurers may operate in part outside UK PRA direct jurisdictions.  
• Solvency requirements on life insurers have eased through Solvency II and Solvency UK.  That has led to record capital ratios.  Most of the benefits have not been passed on to schemes in pricing of BPAs.  PRA press life insurers to be cautious. 
• New owners with high acquisition debt levels to manage may look to adjust ratios.
• Funded reinsurance has shown its hard for UK regulators to keep up with “innovation”.  £40 billion in transfers are deemed by PRA to have had insufficient capital back up.  New business strain at +/-2% was remarkably low.
• The systemic risk of the unfunded, untested insurance sector FSCS scheme working in practice if ever required may now be a “relevant question”.  There is no Government guarantee to provide “certainty” or the “absolute confidence” providers claim.  Disruption is likely.  

The risk-reward analysis for a pensioner is not neutral.  BPA providers should add value share arrangements and trustees should provide inflation cover by Running on 4 Goode.  Trustees need a new risk-reward calculation and to put forward plausible proposals on the exercise of discretion.

And what about deferred members?  To be continued….  Government has a card to yet play to link in its growth strategy and UK investments by cutting the 10% haircut.

Note:
The Ray Goode Report was behind introduction of inflation caps in 1997 and 2005.  The idea was that schemes kept going, allowing real inflation adjusted pensions to be protection by discretion.  Goode held it’s the buying power that matters.

Read next:  I had; I have; I will have: A member's journey to buyout