Understanding Your Defined Benefit Pensions Scheme in 2025

New Year – Same Old Story?

Having worked in defined benefit pensions for over 31 years, with 24 of those spent as a trustee, I’ve become all too familiar with a recurring theme that emerges every New Year. One of the top headlines in the pensions press, often driven by advisers and insurers in the “risk settlement” market, is the same predictable message: “Pricing is good. The market will be exceptional this year. Time to deal.”

The first item on the trustee board agenda, after welcoming everyone and ensuring that the meeting is quorate and noted apologies for absence is to ask whether anyone has any conflicts of interest. My natural inclination when I hear advisers say “time to deal” is to sense a potential conflict…

But, I can only talk about my own experience.

I began 2023 leading nine trusteeship appointments. Of those, three fully bought-in, and one completed a £500m pensioner-only buy-in. At Dalriada, we facilitated over 25 transactions last year. I’ve never witnessed anything like it in my career.

Many individuals who are influencing or driving scheme strategies may be unaware of the full implications of current market conditions, recent regulatory changes, or the complexities of their scheme’s financial position—issues that are critical for making informed decisions on buy-ins, buy-outs, and long-term strategy.

Careful consideration of all the possible options by those who are fully equipped with the facts is of utmost importance for each individual scheme.

A Year of Unprecedented Activity

Looking back at 2024, the pace of activity in the defined benefit pensions world was extraordinary. As schemes edged closer to buy-out readiness, trustees and sponsors faced the challenges of managing improved funding positions. Whilst some opted to execute full or partial buy-ins, many others started serious discussions about their future strategies.

Wind-up is a one-shot opportunity to ensure that you have secured correct entitlements.  Once the assets have gone, your ability as trustee to move is limited.  Having worked on over 200 scheme wind-ups, I can confidently say that the vast majority of schemes uncover something when it comes to the process of data and benefit cleansing. Common problems include failures to equalise benefits correctly or to accurately calculate pensionable salary. Given that 34 years have passed since the Barber judgment, how many schemes have truly ensured compliance? These questions cannot be ignored as schemes move closer to buy-out readiness.

The Changing Financial Picture

Let’s look at how financial markets during 2024 impacted defined benefit pensions: the 20-year gilt yield rose from 4.2% to 5.1%.  In my estimation, this likely led to a reduction in liabilities of approximately 18%.  Over the same period, the S&P 500 (which I use as a proxy for global equity markets, and therefore a proxy to some degree for growth assets) rose from 4,700 to 5,900, an increase of more than 20%. For schemes with growth asset exposure, these shifts significantly improved funding positions.

Unless a scheme has fully hedged its buy-out interest rate exposure and avoided growth assets entirely (a rare scenario, according to PPF Purple Book statistics), it’s likely that their buy-out position has improved, sometimes substantially.

Schemes are now entering what one CFO I work with refers to as “cheque-writing distance.” CFOs, accustomed to hearing only challenges from Scheme Actuaries, are now being told, “You can get this off your balance sheet.” But when they ask, “How much, and when?” they’re often met with a long list of preparatory tasks and a timeline stretching out over nine months or more.

A combination of industry pressures, government policies, and legal hurdles means that substantial groundwork is required before “best pricing” can be achieved. And considering that transactions can sometimes run into the  billions of pounds, even small pricing differences can have a significant financial impact.

The Challenges of “Best Pricing”

GMP rectification. GMP equalisation. Benefit equalisation. Legal reviews of benefit specifications. Data cleansing. Benefit audits. Benefit rectification. Address tracing. Section 37 reviews. Competitive insurer selection processes. These are just some of the tasks that need to be considered in preparation.

Achieving the best possible pricing requires meticulous groundwork—work that simply cannot be rushed. Addressing the issues listed above  is crucial. Yet very few schemes are completely free of such complexities.

Another challenge lies in the administrative landscape. The demand for skilled pension administrators far exceeds supply, leading to delays that can significantly impact schemes considering a buy-in or buy-out.

Three Key Takeaways for 2025

As we step into the new year, here are my thoughts:

1. Understand Your Position. The real priority is understanding where your scheme stands. Your Scheme Actuary should be able to estimate your solvency position.
   
2. Preparation is Key. Efficient transactions require detailed, careful preparation. Whilst a lack of preparation may not result in outright failure, it could lead to avoidable costs running into the millions.
   
3. Act Now to Avoid Delays. If a buy-in or buy-out is appealing, begin the necessary preparatory work immediately. The sooner you start, the better positioned you’ll be to seize opportunities when they arise.

The message for 2025 shouldn’t be “buy now while stocks last.” Instead, it should be about empowering trustees and sponsors to understand their scheme’s position, make informed decisions, and ensure that every action taken is deliberate, well-informed, and value-driven. Let’s make this the year of clarity and purposeful action.