With trillions of pounds in Defined Benefit (DB) pension assets expected to transfer to insurers in the coming years, new analysis from Barnett Waddingham (BW) reveals the financial risk FTSE 350 firms face if they buy out too early – potentially missing out on billions in surplus value.
The findings, outlined in BW’s latest report ‘FTSE 350 pensions: assessing the value of DB scheme run-on’, reveal that if each scheme adopts an optimal endgame strategy, the total surplus available to FTSE 350 companies could rise from around £17bn to £20bn – delivering an additional £3bn to shareholders compared to continuing with current buyout plans.
From burden to balance sheet opportunity
Against the backdrop of the 2025 Pension Schemes Bill, the government is proposing to allow all schemes to access surplus on an ongoing basis – without first securing a full insurance buyout – provided they meet a new, lower funding threshold.
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Under this change, BW estimates that FTSE 350 companies could unlock up to £38bn more in surplus than under current rules – increasing the accessible total from £29bn at a buyout level to £67bn at a low-dependency level.
However, additional analysis from BW reveals that many firms could risk missing out on additional value if they choose to access scheme surpluses too soon.
Optimal strategies and trustee considerations
BW’s analysis shows that while surplus access at the low dependency funding level could unlock significant value, most FTSE 350 firms would benefit more by running their schemes beyond a buyout funding level. Only a third (33%) of schemes would see the greatest value from a buyout as soon as it becomes affordable.
For the remaining 67% of firms, the financial case is stronger for running on their DB schemes rather than buying out as soon as it becomes affordable. On average, the optimal run-on period for this group is around 10 years, with larger schemes benefiting from a longer timeframe. Failing to take this approach could mean missing out on material additional value. For around 10% of companies, this potential surplus is equivalent to more than 5% of their market capitalisation.
For businesses, this reflects a growing recognition that DB schemes, once seen as a financial burden, now present a material asset, which can be used to strengthen balance sheets, improve cashflow and release tied-up capital.
And for trustees as surplus access becomes more viable under proposed reforms, they will need to consider whether releasing it is in the interests of members. They will also need to assess the strength of employer covenants, ensure adequate safeguards are in place, and consider whether a share of surplus should be allocated to members to reflect any increased risk.
Lewys Curteis, Partner at BW, said: “These findings mark a significant shift in how FTSE 350 firms could soon view their Defined Benefit (DB) pension schemes. Once the financial skeletons in the closet, they are fast becoming ‘hidden treasure’; with financially material surpluses able to support growth, improve balance sheets and cashflow and even mitigate the cost of the DC scheme.
“The Government’s proposals to free up pension assets through the Pension Schemes Bill are welcome, but they add an extra dimension of complexity to endgame planning. Not only do sponsors and schemes need a plan for how to close deficits, they now need to reconsider what they do when they achieve full buy-out funding. For the majority of schemes, holding their nerve by delaying buy-out for just a few years could be worth billions.
“Sponsors and trustees will only get one shot at buyout – and doing it too early could mean walking away from serious long-term value.”
