We have seen maintained strength in funding positions for UK defined benefit pension schemes (£70bn surplus for FTSE100 companies on an accounting basis at the end of Q3 2023).  This resilient position is the perfect backdrop to consider whether the pension scheme can now be an asset to support the business in ways previously unimaginable.

Developments over 2023, including the Chancellor’s Mansion House speech and Autumn Statement, all point to a more positive relationship between pension schemes and a sponsor’s finances. Directors now face a prime opportunity to steer their businesses to make the most out of this position, and avoid trustees defaulting to the well-trodden path of insured solutions without fully considering the range of alternatives and how these could lead to better solutions for both their business but also members of the pension scheme. 

Here, I once again put on a ‘Company Director’ hat and think what actions should I be prioritising for 2024? 

• If still paying contributions into the pension scheme, this must be reviewed immediately even if this falls outside of a funding valuation cycle. Should additional support be required to protect members’ benefits, consider alternative forms of security to cash as these may well be more efficient. 
• Ensure a thorough grasp of the funding position on all measures and understand the entire spectrum of current options available for the scheme.
• If the best outcome for the business is to get the pension scheme and associated risks off the balance sheet, there are now more options than ever, and each should be considered carefully. Whilst the insured buy-in market remains buoyant, a superfund transaction and a number of other options for external capital have broadened the landscape for pension scheme end-game options. These innovative, non-insurance solutions may be more attractive from both a cost and member outcomes perspective. 
• This is the best time for flipping schemes into an asset. The combination of stable high funding levels and low level of risk makes running schemes on for longer more feasible.  With this, further surplus could be generated from the pension scheme and used to support the business as well as improve member outcomes. On the former, surplus could be used to fund ongoing pension costs and new benefits for current employees reducing the corporate cash burden in a challenging economic climate. On the latter, the value created could enhance member benefits, providing some relief from cost-of-living pressures and bolstering retirement savings. In this new world of opportunities, sponsors should have an active role on the investment strategy for the schemes – to optimise the balance between risk and returns.
• No matter the chosen route, the key takeaway is to remain agile. If the last few years have taught us anything, it’s that things can change quickly, even in pensions. Staying well-informed and alive to market opportunities is essential to navigating these changes.  

The mood music on sponsors accessing surplus is certainly changing, with the cut on the tax rate that applied to a refund of surplus from 35% to 25% being a welcome factor for all sponsors. Pension schemes and their sponsors are coming to terms with the fact that the potential rewards for both members and the sponsor from running on a scheme to generate surplus may outweigh the perceived risks in many cases.    

Looking ahead, 2024 will be a fascinating year, and pivotal period for many sponsors regarding their relationship with the pension scheme, one way or another. Personally, I am very much looking forward to making sure sponsors’ objectives are at the forefront of pension schemes’ strategic journeys.