Fragmentation causes value loss in DB schemes, finds Brightwell

Brightwell has released a report on the future of defined benefit (DB) pensions, which found fragmentation in the sector is causing duplicated costs and value leakage.

Most UK DB schemes have closed to new members, but the sector is expected to remain significant, according to its ‘DB 2036: Out of the Woods’ report.

The Pension Protection Fund (PPF) projects there will still be £880bn in assets under management (AUM) in DB schemes by 2036.

Value leakage was a major concern raised in the report, with schemes looking to cut duplicated costs and keep outcomes stable for members and sponsors. 

Protecting and delivering members’ benefits remains a priority, with trustees and sponsors focused on secure pension payments and adapting the member experience for an ageing population.

Large, well-funded schemes are now choosing to run on rather than buy out, aiming to retain control and value for both members and sponsors. 

Administration and operational resilience are under strain, with issues including legacy systems, skills shortages, cyber risks and increased regulatory workload.

Leaders in the sector have developed a risk-aware culture and are open to reform, but say clearer guidance is needed.

Morten Nilsson, CEO at Brightwell, said: “After decades focussed on repairing deficits, the majority of DB schemes are now operating from a position of relative strength yet are faced with a new set of strategic decisions that will shape the future of member outcomes. 

“As the market evolves, a handful of larger schemes with strong covenants will remain. 

“For these, adopting a partnership-led approach can enhance resilience, lower operational friction and costs, and improve outcomes for sponsors, schemes, and members.”

Alastair Russell, pensions director at EDF Energy, said: “The pensions industry and the regulator are now acknowledging that there is another endgame beyond buy-out. 

“Those schemes that do plan to run-on need to make it a conscious strategy and step up to ensure their governance model continues to evolve to be fit for the future.”