With more endgame options becoming available to UK DB pension schemes, it has become increasingly more challenging for Trustees to choose the right option. As a part of this decision-making process, Trustees and sponsors must consider a number of key factors that will help them to weigh up their options and is why there is no ‘one-size-fits-all’ option when it comes to endgame.

The endgame decision process:

 

Funding Position

An obvious consideration but a vital one, nonetheless. The funding position is the ‘health check’ of a pension scheme at a moment in time and hence can help distinguish the options available.

However, looking at this statistic alone cannot offer much information of a scheme’s situation, as an underfunded scheme may look unhealthy, but for an underfunded scheme with an immature membership profile immediate decisions are not required.

Scheme Maturity

A more mature scheme can be much more attractive for insurers due to the low-risk nature of the liabilities, so cheaper transaction costs can often be seen in the bulk annuity market.

Similarly, a mature scheme is likely to be cashflow negative, and therefore liquidity is one of the key considerations when designing the investment strategy.

Investment Strategy

Perhaps the most important factor influencing the endgame option is the current scheme’s investment strategy. Buy-out will require a highly liquid portfolio for insurers to take on, which will take time to evolve while run-on or a captive insurance arrangement can offer more flexibility.

Scheme Rules

Scheme specific rules can enforce restrictions on the endgame options, such as how surplus is distributed.  Run-on will still be a consideration under this example, but it limits the surplus release opportunities.

Covenant

Representing the ability for the pension scheme to receive financial support from its sponsor, the scheme’s covenant can give an indication of what options are available to the scheme. Run-on will require a reasonable level of covenant to support the scheme.

It is not possible to decide on the best endgame option from one of these factors alone; the Trustees and sponsor need to consider all factors as a collective. For example, a scheme with a poor funding position will still have multiple options available to them, however a scheme with a poor funding position and weak covenant suddenly has fewer options and can be limited to routes such as superfunds.

Quantifying these factors can lead to a better understanding of the future impact to the scheme under each endgame option. Stochastic ALM analysis allows pension schemes to play with these factors like toggles, zooming in on the most important factor to that scheme. Combining the current funding position, the investment strategy and the schemes maturity can help model how the endgame options compare to each other under various metrics like liquidity, probability of requiring deficit contributions and expected surplus generation.

In our recent whitepaper, we walk through case studies that use ALM analysis to take these factors into consideration.

 

Interested to know more?

Download the whitepaper for a full comparison of endgame options where we evaluate the options using GLASS.

This article is the fifth in our series on rethinking the endgame for UK defined benefit pension schemes,

Our first article, Is Buy-Out Still the Default Endgame for DB Pension Schemes? can be found here

Our second article, Comparing Three Endgame Routes for DB Schemes: Buy-Out, Captive Insurance and Run-On, can be found here

Our third article, Running On a DB Pension Scheme, can be found here

Our fourth article, Captive Insurance Buy-Ins: An Alternative to Traditional Buy-Out, can be found here

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