Last year a new concept took hold in the UK’s closed private sector defined benefit schemes – rather than transferring all the assets to an insurance company, why not run-on these schemes instead?
There are clear incentives for the industry to maintain pension schemes – it keeps investment consultants in work and provides opportunities for asset managers.
It was only going to be a matter of time before the government realised run-on was also a way to encourage these schemes to invest some of the £2 trillion they manage in UK productive finance.
In January this year the government said it was seeking to lift the restrictions on how pensions were investing their surpluses. There has been little additional detail on what these changes could look like.
Which schemes will run on?
While scheme funding positions have dramatically improved, just because run on is possible does not mean it will appeal to every scheme.
It’s better suited to a well-funded scheme with a strong sponsor. And it’s hard for a scheme smaller than £100m to consider this option.
But it’s not just funding position, covenant strength and pension size which will determine whether a scheme runs on – DB trauma is also a factor.
If a finance director has spent the last two decades losing sleep over a volatile pension scheme wreaking havoc to the balance sheet, they are unlikely to want to keep hold of this enfant terrible.
Spend that surplus!
Perhaps the biggest motivation to run is the financial benefit of the surplus. With a reasonable investment strategy, consultants say it could be possible to generate a surplus of more than 20% of current scheme assets over a future 20-year time frame.
And schemes have started to think how surplus could be divided up between the employer as well as DB and DC scheme members. Improving members benefits is one of the key important motivations for paternalistic schemes.
Sustainability commitments
For trustees and companies which have a strong sustainability ethos, run-on could have greater appeal as a pension scheme can keep control of its investment strategy.
When a scheme decides to enter into a buy-out agreement with an insurance company, it hands over control and trusts that firm will invest those assets sustainably over the decades it manages the benefits.
Asset management opportunity
With many asset managers feeling locked out of closed private sector DB schemes after the LDI crisis, could run-on be a way back in?
Possibly. The reality is run-on will not be for everyone and even if a scheme does take this option, it will still want to invest in a way to preserve its surplus.
But for those with a paternalistic or strong sustainable ethos, there will be opportunity. It will be about developing the right strategies to suit these schemes.
That will require building strong client connections to understand these target clients’ needs.
