The Changing “End-Game” for Defined Benefit Pension Schemes

It has been a long-understood aspiration of Trustees and Employers that their pension scheme will eventually be bought out with an insurance company and the liabilities transferred. Recent market developments have raised questions as to whether this is still the likely “ending” for many schemes.

As TPR ask trustees to look at and set a Long-Term Funding Target for each scheme, trustees find themselves with several more options to consider for this target; and are indeed in a position where even more options will continue to be developed.

The current alternatives, neatly outlined below, either still target buyout or look to create “superfunds” where the time-consuming governance associated with trust-based pension schemes is streamlined. Running the scheme as “self-sufficient” remains an option, though realistically trustees probably still expect that the liabilities will be bought out eventually, when the scheme gets far enough down the benefits “tail”.

Each scheme’s decision on end-game starts with the current funding level, scheme maturity level and strength of employer covenant.

• If a scheme has such funding/covenant as to be already at self-sufficiency or nearing its end-game, then this is a fabulous position from which to look at these options in more detail and assess what might work best for members and employer; whether immediately or in due course.

• If the scheme isn’t in a position to be seriously looking at the end-game, then any desire to remove the pension burden from the employer is going to take a lot more work on journey plans, contingency plans, and strategy. But just because the journey might take longer (which is more acceptable to immature schemes or those with strong covenants) or might be a bit bumpier, it’s worth noting that there are still thousands of trust-based pension schemes and many in similar positions, so a new wheel doesn’t need to be invented for every case.

Either way, having experienced trustees usually adds great value; they will keep track of market developments, manage projects and adviser costs effectively and share with/take away the administrative burden, including ensuring compliance with increasing governance requirements and scrutiny coming with the introduction of the new Code of Practice (but that’s for comment on another day). All of this enables the employer to focus on running their business and providing a good covenant.