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Shaping the Case for Captives: Insights from the DB Options Consultation

In this final article of our captives series, I explore how the recent regulatory momentum could lead to increased interest and uptake of captives among UK corporates.

The regulatory landscape of DB pension scheme management is undergoing significant evolution, evidenced by the insights from the Department for Work and Pensions (DWP) consultation paper titled ‘Options for Defined Benefit Schemes’, released on 23 February 2024.

Access to DB Surpluses

One of the central proposals aims to facilitate access to DB surpluses, intending to empower schemes and Sponsors to invest surplus funds in productive assets while safeguarding member security. Currently, schemes face constraints when refunding surpluses to employers, primarily contingent upon scheme rules, funding levels, and trustee approval. The consultation paper proposes the removal of barriers to surplus payments, potentially introducing statutory powers to amend scheme rules or make payments without explicit rule amendments.

Additionally, both the consideration of a lower funding threshold for surplus payments and the simplification of trustee processes further support the government’s commitment to facilitate surplus sharing between employers and members. Notably, the tax rate on surpluses has already moved from 35% to 25%, further emphasising government support for Sponsors to access and utilise surplus funds.

The recent DB options consultation, coupled with potential regulatory reforms aimed at easing surplus regulations, signifies a pivotal moment for captives. The consultation reveals key themes, including assessing scheme objectives, surplus utilisation, and eligibility criteria, all of which directly influence the case for captives. The prospect of greater access to surplus funds, along with regulatory reforms promoting risk management innovation, enhances the appeal of captives as a strategic tool for managing pension liabilities

What should sponsors do next?

As companies assess the future of their DB pension schemes, exploring all available end-game options is critical. This involves a comprehensive evaluation of all available strategies such as buy-in, buy-out, captive insurance, and self-sufficiency to determine the most suitable path forward.

As the trend towards captives gains momentum, it signifies a significant paradigm shift in the landscape of alternative risk management strategies for managing DB pension schemes. Companies willing to invest in captives stand to benefit from greater control over pension assets, enhanced flexibility, and potential long-term cost savings.

Finally, trustee engagement should be prioritised to ensure that end-game options are evaluated through a lens of member security and long-term financial sustainability. Companies can, and should, highlight the benefits of captives to gain trustee support.

If you are interested in learning more about captives and how they can benefit your company’s pension management strategy, we welcome you to reach out to us for further discussion and insights. Our team is here to provide expert guidance and support tailored to your specific needs and objectives.

You can read our response to the ‘Options for DB schemes’ consultation here.