Maturing schemes and endgame planning: The pensions ‘teenage years’

As we talk increasingly about scheme ‘maturity’, it occurs to me that being a trustee is a bit like being a parent. (Bear with me.)

Like parents raising their children to stand on their own two feet, trustees are essentially managing their pension scheme until it’s time to wind up.

Just as most parents don’t want their children to live with them forever, most trustees aren’t going to run their scheme until they pay out the last pound to the last beneficiary. This could be a very long time in the future and by that point the running costs may well have become disproportionate.

The big question facing families and trustees is when is the ‘right’ time to make the transition. For some it could be very soon, but others might make an active choice to stay right where they are for the foreseeable future.

Both tend to group loosely into the same three main ‘camps’.

Out the door as soon as possible

Some parents think it best their kids move out as soon as possible and are able and willing to put their hands in their pockets to make that happen - whether that’s putting down a deposit on a house or meeting higher education fees.

Some sponsors and trustees will be targeting a full scheme buyout at the earliest opportunity so they can get the scheme ‘off the books’.  This may sound very attractive, but transferring risk comes at a cost.

A big change to a company’s pension arrangements could also have a material accounting impact for the business, which would need managing. As such, this option won’t be on the table for all schemes.

They can stay as long as they like

Some parents will be happy for their kids to stay at home if they pay their own way and invest in their future. However, let’s face it, while your kids live under your roof, if something goes wrong, you’ll be stepping in to help. 

Some trustees and employers may be similarly relaxed about running on their scheme as long as it is self-sufficient and low maintenance, and they are comfortable carrying some risk for the medium to longer term.

This may be the preferred strategy because it avoids having to inject cash or accommodate a big accounting change now. They may think it best to continue to pay benefits and allow liabilities to naturally reduce as the membership ages.

Perhaps they want to take more time to prepare for risk transfer in the future – for example, by generating investment returns to help meet more (if not all) of the premium cost, to reduce liabilities, or to make the scheme more attractive to an insurer.

Some employers may simply be reluctant to effectively hand over returns to an insurer if they believe they can manage the risks themselves – and potentially find ways for employers and members to benefit from any surplus.

However, this is a complex area and options will vary depending on a number of factors. It is therefore vital that employers don’t make assumptions as to how this might work for their scheme.

They can stay until the right opportunity comes along

Some parents are comfortable for their kids to stay at home but only if they save carefully and closely monitor the housing market, so that if the right option appears they don’t miss out.

Some schemes won’t have an immediate need to buy in or out, but may be keen to move for the right deal. This type of strategy has obvious advantages, but it only works if you monitor the insurance market closely and prepare so you are ready to transact quickly when the time comes.

The similarities don’t end there. Many sayings ring just as true when it comes to endgame planning for your maturing scheme as they do to helping your kids find their way in the world.

Everyone is different

What’s right for one scheme isn’t necessarily right for another. Just because some schemes are targeting buyout, it doesn’t mean all schemes should be.

There are lots of factors that will influence an appropriate endgame strategy. There may be good reasons why a scheme isn’t targeting either buy-in or buyout in the foreseeable future.

It’s good to talk

When it comes to endgame strategy, trustees and sponsors need to be pulling in the same direction as they will have to work together to implement it.

Some will have a clear plan. For those that haven’t, the latest developments in the defined benefit funding regime will bring them to the table soon, as long-term funding and investment strategy considerations will need to form part of triennial actuarial valuations.

If you fail to prepare, you prepare to fail

Whatever your strategy, it is always better to plan for it than to sleep-walk into it.

The work needed to prepare for an insurance transaction seems obvious: training, data cleansing, benefit specification drafting, targeting investments.

However, running on a scheme also has challenges and opportunities, requiring the right structures and systems in place to make it work. It’s therefore just as important to prepare to run on as it is to prepare for buyout. 

Things change

Even for maturing schemes, endgame strategies can have long time horizons. Trustees and employers therefore need flexibility to evolve and adapt their strategy over time.

For example, what if there was a material shift in the funding level, membership, the insurance market, or the sponsor’s business? What if new governance requirements meant the cost and risks of running the scheme significantly increased?

Ultimately, if your scheme is rapidly maturing and its endgame is coming into sight, it’s definitely time to start actively planning and laying the right foundations for the future.

Even if you don’t think your scheme is going anywhere anytime soon.

Naomi Brown is a senior counsel at Sackers.