Executives note that companies managing traditional pension funds are facing substantial financial losses when they choose to execute buyouts with insurers, as highlighted by the leader of one of the UK’s largest retirement funds.

Morten Nilsson, CEO of the £37 billion BT Pension Fund, expressed support for government initiatives aimed at allowing employers to reclaim surpluses from defined benefit pension schemes. He believes this will motivate sponsors to continue managing their plans rather than opting for buyouts, which effectively transfer significant funds to insurers.

According to Nilsson, who also oversees the EE pension scheme and the mineworkers’ plan through Brightwell, many corporate boards might find it more beneficial to retain their schemes instead of completing buyouts. He emphasized, “They need to recognize that they are surrendering a substantial amount of money with a buyout,” suggesting that the new regulatory frameworks could alter this perspective.

In a buyout scenario, employers relinquish both the scheme’s assets and full responsibility for honoring pension commitments to an insurer. This process usually involves an upfront payment and can hinder employers from benefiting from potential future returns if the investments perform well.

A shift in corporate strategy away from buyouts could pose challenges for insurers like Legal & General, Aviva, M&G, and the Phoenix Group, which are relying on projected buyout agreements valued at approximately £50 billion annually to enhance their earnings.

Recently, Sir Keir Starmer and Chancellor Rachel Reeves presented plans to facilitate the recovery of surpluses from defined benefit schemes, estimating that businesses could reclaim up to £160 billion, thereby stimulating economic growth.

These reclaimed funds could be reinvested into core business operations to bolster productivity or be allocated towards improved pension benefits. Easier access to future surpluses might also encourage employers to pursue more aggressive investment strategies rather than opting for secure but lower-yielding government bonds.

Currently, defined benefit schemes manage approximately £1.1 trillion in assets, with 75% of the 5,000 remaining schemes reportedly in surplus, according to Downing Street. Surpluses, driven by rising bond yields over the past three years, have reached around £160 billion.

Nilsson remarked that these reforms could change how companies perceive their defined benefit pension plans, viewing them as valuable assets worth cultivating. He noted, “The existing legislation places all the risk on employers without allowing them to access any potential benefits.”

However, not everyone shares this optimism. John Ralfe, an independent pensions consultant and former Boots scheme manager, criticized the proposals as inadequate, stating, “The government is raising unrealistic hopes by discussing the release of £160 billion. While some employers might retain pensions and eliminate a surplus, the reality will likely involve a few billion pounds, rather than the quick financial windfall the Chancellor envisions.”

As for BT, the company is currently not in a position to reclaim surpluses from its pension scheme, which reported a £3.7 billion deficit as of June 30, 2023. With future pension obligations amounting to £41 billion owed to 258,000 current and past employees and assets totaling £37.3 billion, they have reached an agreement with trustees allowing for surplus recovery from 2034 if their annual contributions of £600 million yield excess funds.