Managing Defined Benefit scheme surpluses

DB scheme surpluses - What are the options?

Irish defined benefit (DB) pension schemes have seen material improvements in funding levels in recent years, notably accelerating after the significant rise in interest rates in 2022, a fall back in inflation expectations and the strong performance in recent years of growth assets such as equities.

Analysis completed as part of LCP’s Annual Pensions Accounting Briefing indicated that the defined benefit pension schemes of many large Irish employers are now reporting a surplus in their company accounts with average funding levels reported of c110%.

The emergence of a pension scheme surplus gives rise to new opportunities and considerations for the pension scheme trustees and sponsors alike. Indeed, we recommend that trustees and employers revisit their journey planning now in light of recent market movements to consider their strategy in relation to a number of items including:

• Surplus recognition and ownership of surplus
• Use of Surplus including:
  • De-risking the scheme investments
  • Discretionary increases to benefits
  • Amendment to scheme factors
  • Paying expenses from assets
  • Refund to the employer
• Acceleration to settlement of benefits including:
  • Bulk annuities (pensioners and members not yet retired)
  • Enhanced Transfer Value exercise using the scheme surplus In many cases the Trustees and Employers interests and objectives are aligned.

However, this is not always the case when discussing ownership and use of surplus. It is important, therefore, that trustees and employers receive advice that is clear, aligned with their objectives and unconflicted.