On the go: Companies can lower the cash costs of their defined benefit schemes by up to 30 per cent if they implement an effective endgame strategy, instead of heading down the Pensions Regulator’s fast-track route, according to Hymans Robertson.
In March 2020, TPR launched a consultation on the DB funding code, where it announced its plans for a new split approach to DB scheme funding.
Under the new approach, schemes would have to opt between two choices: a prescriptive fast-track funding arrangement that would be subject to less regulatory scrutiny, or a bespoke arrangement that would face stricter oversight.
Hyman Roberston’s analysis suggests that if a company is able to pledge security to adopt a bespoke, corporate-focused approach, it could reduce best-estimate cash costs by up to 30 per cent compared with following expected fast-track requirements.
Schemes taking this bespoke option would, additionally, have more time to recover from any funding shocks, the consultancy noted.
The modelling also highlights that this approach could save as much as 65 per cent when compared with a route that might be followed by the trustees if the company does not properly engage with the endgame discussion.
The responsibility is on the company to work with their trustees to ensure all options are explored, Hymans stated.
Commenting on the analysis, Leonard Bowman, head of corporate DB endgame strategy at Hymans Robertson, explained that if a company wants to intelligently manage its pension costs and risks over the lifetime of the scheme, “then simply having a long-term funding objective is not enough”.
“A holistic strategy and associated governance framework need to be planned and put in place, as the long-term funding objective is only one piece of many in the DB endgame jigsaw,” he explained.
“Our modelling sought to find out the costs of schemes taking different paths along this journey and stark differences can be seen.
“With cash cost reductions of around 30 per cent to 65 per cent, it is clear that taking the wrong path, making a poor choice and failing to execute these final stages in the best way could lead to significant extra costs.”
Bowman warned companies of the need to look carefully at the value that offering security can bring.
He said: “If this means a move away from fast-track becomes feasible, then by providing the trustees with greater long-term comfort, in a way that is not just linked to the company covenant, our modelling shows the significant economic value that can be generated for corporations.
“Improved security can support longer recovery plans. It can also prevent any short-term fluctuations that a scheme experiences from disrupting long-term funding and investment strategies.”
Bowman continued: “By seeking expert guidance as they face these momentous decisions about the DB endgame strategy, companies can ensure that nothing gets missed.
“Having an understanding of all the options available and making sure they have all been considered will mean that these cost savings are maximised.”
