A brief guide to investing for surplus release | Insight Investment

For 20 years the pensions industry has focused on the de-risking of DB pension schemes. But with the majority of schemes now in surplus¹ we are seeing the beginnings of a big mindset shift. That shift is to contemplate how a scheme could invest its assets to realise their full potential for the benefits of members, sponsors and society, and without putting member benefit security at risk.

• We estimate that many DB schemes could already buy enough contractual assets with cashflows to more than cover benefits, even under very stressed market scenarios.
• We demonstrate how a portfolio of contractual assets could generate a surplus even under a stressed default scenario while preserving member benefit security.
• For such a portfolio we favour shorter-dated contractual assets due to a greater weight of issuance enabling greater geographical, issuer and sector diversification.
• For those targeting a higher surplus, a small allocation to equities can complement a core contractual portfolio. We demonstrate the potential upside and downsides of a 5% equity allocation to such a portfolio.

¹ Source: Occupational defined benefit (DB) landscape in the UK 2023, February 2024, The Pensions Regulator. It reported that 3,620 schemes out of 5,297 are in surplus with funding on a low dependency basis.