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UK employers must help shape pension risk transactions to prevent a £70 billion hit to profits

UK employers must help shape pension risk transactions to prevent a £70 billion hit to profits

06 Nov 2023

  • Around 25% of DB schemes are now able to buyout and for most this has come about sooner than expected.
  • For these schemes, employers risk a significant £70bn one-off hit to their profits without preparation and mitigation ahead of any pension insurance transaction.
  • Proactive engagement is also leading some employers to explore running on their schemes to generate surplus.

With the funding position of most UK DB pension schemes improving significantly over the last 18 months, many trustees have very quickly pivoted to exploring opportunities to pass on their liabilities to an insurer. According to research by XPS Pensions Group, 25% of schemes are now in a position to fully secure benefits with an insurer.

Employers should pay close attention to the accounting implications of these insurance transactions. Given accounting rules, the impact of an insurance transaction is often required by auditors to be recorded as a hit to profits, particularly for full insurance deals. For the 25% of schemes in a position to insure benefits, this could lead to a £70bn charge to corporate profits based on current market conditions.

Simon Reddish, Head of Corporate Accounting at XPS Pensions Group said: “Whilst pension insurance transactions mean that members’ benefits can be secured and the sponsor can remove risk and obligations from its balance sheet, it’s important to look at options for structuring transactions and understand the accounting implications. The default for a whole scheme insurance transaction is typically a P&L charge but this can be managed or removed by considering the structure of the transaction. It is not the trustees’ role to consider accounting impacts so we are working closely with employers to help them contribute to the shape of any transaction.”

Along with managing the accounting risk, some employers are testing the right long-term strategy for their schemes. This includes looking at ways to run on their schemes, with or without using insurance. Recent research conducted by XPS found certain changes in pensions law governing the use of DB pension surpluses could unlock £100 billion of value from larger pension schemes over the next ten years, without creating unacceptable risks to benefit security. This could be used to improve outcomes for DB members, close the generational gap in DC retirement savings or invest in employers’ UK businesses.


The £70bn figure quoted in this announcement covers the 25% of schemes which are expected to be able to pass on their obligations to an insurance company based on market conditions at 30 September 2023. The impact has been calculated as the estimated accounting adjustment assuming a buy-in followed by a buyout transaction with a material part of any surplus on any insurance cost being used to provide improvements for existing members.

The £100bn figure quoted in this announcement is based on XPS analysis of a subset of UK DB pension schemes (where running on is viable) that are in surplus on a buyout basis (or are expected to reach surplus over the next ten years) on a low risk investment strategy such that the surplus could be safely used without risking the security of member benefits.

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