Transferring Pension Funds to Insurers May Cost Companies £125 Billion

Publicly listed companies with traditional pension funds might lose £125 billion if they proceed with plans to transfer these funds to insurers, a leading pension scheme adviser has warned.

Defined benefit schemes have seen significant improvement in their funding levels, suggesting that employers might benefit from continuing to operate these schemes rather than opting for buy-out or buy-in agreements with insurers, according to pension consultancy Barnett Waddingham.

Many employers are considering offloading legacy pension schemes, which provide little or no benefit to their current staff. Insurers are eager to acquire the assets and liabilities of these schemes. Most current employees participate in defined contribution schemes, which are based on individual contributions, rather than defined benefit schemes such as final salary pensions.

Lewys Curteis, a principal at Barnett Waddingham, highlighted that the drastic improvement in the health of defined benefit schemes means that employers might unnecessarily transfer billions of pounds that could either be returned to their shareholders or enhance pension payments for scheme members.

“We encourage companies and trustees to thoroughly evaluate the potential benefits of a run-on strategy before making the irreversible decision to transfer to the insurance market,” Curteis stated. He added that some employers are already exploring the run-on option and others have decided to delay involving insurers.

Such reconsideration of pension risk transfer deals—including bulk annuity transactions, buy-ins, and full buy-outs—could disrupt the expansion plans of insurers like Legal & General, Aviva, and Phoenix. M&G has recently re-entered the market, appointing Kerrigan Procter, a former senior executive from Legal & General, to lead its expansion efforts.

In April, the Conservative government made run-on strategies more appealing by reducing the tax on surpluses from defined benefit schemes from 35 percent to 25 percent. The Labour government appears committed to following the same approach. The Department for Work and Pensions has consulted on several options, including a statutory override to simplify employer access to surpluses, a reduced acceptable funding level for surplus extraction, and a super-levy payable to the Pension Protection Fund to allow schemes to repay surpluses to employers while remaining eligible for industry protections.

The £125 billion loss estimate assumes that all defined benefit schemes sponsored by FTSE 100 and FTSE 250 companies are transferred to insurers at current market rates for pension risk transfer deals. Insurers typically price these deals to cover additional capital costs, restrictions on asset choices, and profit margins.

“If this value instead benefits members and sponsors over time, it could be advantageous for UK PLC, the tax authorities, and workers alike,” Curteis noted.

With many employers keen to eliminate their defined benefit schemes, which they view as unreliable distractions, trustees are generally in favor of insurance deals that mitigate the risk of the sponsoring employer’s potential insolvency.

Rising bond yields, reflecting expected risk-free returns, have boosted funding levels in recent years. As of May 31, around 35 percent of FTSE 100 and FTSE 250 companies’ pension schemes were fully funded on a buy-out basis, meaning they could be transferred to insurers at no cost, Barnett Waddingham estimates.

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