Run On v Buyout : Risks; Benefits; Policies

26Strategic Key Points for Trustees / Sponsors

RISKS

How likely?  Remote
Risk to member benefits where there is an investment grade sponsor and a fully funded scheme are low.  The uncorrelated risks can be together lower than for the single risk of a life insurer’s solvency: 

Probabilities of pension scheme falling into PPF:
This occurs on the combination of a sponsor becoming insolvent AND its DB scheme not being funded to buyout levels.

– In the short term (1 year) the chance of a scheme with a BBB rated sponsor falling into PPF is 0.026% (0.13% x 0.2), or less than 1 in 3000 given a low dependency starting point.

– Looking forward 10 years, the chance of that happening is 0.56% (2.78% x 0.2), or 1 in 175 given a low dependency starting point (see PPF entry probability notes below).

How much?  Reducing steadily
Proportion of accrued benefits not covered by Pension Protection Fund (PPF) now modest.  It is falling for deferred members as they retire.  

– Pensioners covered in full up to 2.5% inflation cap.

– Deferred 10% reduction for deferred members.

N.B. Proposal is for PPF to remove the deferred haircut where schemes have a minimum level of UK investment.

Impact of discretion:  Endgame gamechanger
Discretionary payments can mean members are better off even if scheme subsequently joined PPF.  C-Suite has model to calculate what is at risk and how much is needed to cover that risk.

– Focus should be on protecting the “real value” of pensions given 5% and 2.5% caps on inflation increases introduced in 1997 and 2005.

Safety nets.  How secure?
PPF is well run with clear processes and has a large surplus.  Financial Services Compensation Scheme has little resource and is a sector “agreement to agree” with Bank of England / PRA.  FSCS brings political risk not a Government guarantee.  PRA states that buy-ins can lose value for policy holders.  The “absolute confidence” and “complete security” of life insurer marketing materials is now a stretch.  There is no stop loss.

BENEFITS

​​How much?
10% plus annual added payments to members link to an allocation of around 0.5% of assets a year.

Authorised Payment and surplus use rules incoming in April 2027 make exercising discretion more attractive and practical.  Government expects trustees and sponsor to negotiate share of surpluses and phasing of payments.  C-Suite has a Surplus Allocation Value Share model.

Our model shows that a scheme running an investment strategy around gilts +150bp can pay consistently significant amounts to both sponsor and members.  Guardrails can be set leaving a sustained buffer.
We would expect life insurers to introduce mechanisms to enable members to share in value over time.

CONCLUSION

Run-on may now be no more risky than buyout and have a substantial upside for members and sponsors.  PPF provides a funded stop loss.  FSCS does not.

Government can coordinate its regulators and add incentives to link the £1.3 trillion in assets held to meet DB pension liabilities more closely to the Growth Agenda.  

Policy Proposals to Generate Growth and Protect Real Pension Values

• Coordination between PRA and TPR on investment return policies and practice for life insurers and DB scheme.  Anomalies between “low dependency” and “matching adjustment” returns addressed.  This can be part of an exercise for a revived “Joint Forum on Actuarial Regulation”.  
• Government set out what are minimum (not mandated) expectations for “UK Growth Investment Allocations” of UK gilts and productive asset levels.  (UK Growth Allocations):
• No 10% reduction by PPF for deferred members for schemes with UK Growth Allocations.
• Sponsors able to reclaim (25%) tax paid by schemes on surplus payments to sponsors up to 1) an annual limit and 2) UK capital investment and pension contributions in the year exceeding the surplus receipt.
• Provide life insurers with incentives to meet UK Growth Allocations.  Introduce levy on value of assets held to cover UK DB liabilities to cover PRA supervision and FSCS arrangement where life insurer does not meet UK growth allocations for gilts and productive assets.
• Bank of England / PRA to review FSCS position given Solvency UK (notably Risk Margin reduction), regulatory equivalence and changed ownership of insurers.
• Charities provided with 100% PPF cover.
• Appended is our note “Incentives are the Additive Needed for Concrete Proposals for Growth”.

With coordination between regulators and with Government policies supplemented with incentives, the assets behind DB pensions can provide better pensions and stimulate growth.  Life insurers and trustees should respond to the opportunities positively.

PPF Entry Probabilities Notes

Note: Schemes funded at close to buyout levels would be able to secure benefits above those of the PPF – PPF Plus funding level.  

*S&P Data Source: Default, Transition, and Recovery: 2025 Annual Gl | S&P Global Ratings