Trustees urged to consider all endgame options as rule changes loom

The Pensions Regulator (TPR) this week published new guidance for DB scheme trustees around endgame options, taking into account the emergence of superfunds, the option of running on, and forthcoming changes to rules around surplus extraction.

Patrick Coyne, TPR’s interim director of policy and public affairs, said the robust funding level of most DB pension schemes meant that there were “new options and choices” open to trustee boards.

“In the past, trustees and employers have considered insuring benefits as the end goal of their scheme,” Coyne wrote on TPR’s website. “The insurance sector has capital requirements which mean that insurers can withstand 1-in-200-year shocks. It is still a good option for many.

“But insurer buy-out is not the only option for trustees to consider. Ongoing market innovation has led to a wider range of financial, governance, and insurance options…

“Not every option will be right, or even available, for every scheme. Trustees need to really think about the specific circumstances of their scheme and their members.”

“In certain cases, we are seeing schemes pausing buy-in processes to reconsider the options available. We have also seen firsthand how adopting new solutions can lead to better member outcomes.”

Matt Cooper, PwC

The regulator’s guidance emphasises that trustees must “act consistently with the terms of your trust”, taking into account a wide range of factors including the member experience, sustainability and ESG considerations, the impact on covenant, and costs.

It covers run-on strategies and the potential changes to surplus release rules, as proposed by the government last week. It also provides guidance and information about commercial consolidators or superfunds, capital-backed arrangements, and bulk annuities, and what the regulator expects trustee boards to consider and which stakeholders to engage with.

Trustee boards already reconsidering options

Matt Cooper, head of pension risk transfer at PwC, said the emergence of new services was already leading some trustee boards to reconsider their plans.

“In certain cases, we are seeing schemes pausing buy-in processes to reconsider the options available,” he said. “We have also seen firsthand how adopting new solutions can lead to better member outcomes.”

Laura McLaren, head of DB scheme actuary services at Hymans Robertson, said: “The landscape is changing quickly, and this underscores the sheer breadth of issues to think about.

“Indeed, as this round-up of factors and case studies show, there is no one-size-fits-all answer, and it is important that scheme and sponsor specific circumstances are robustly considered. Schemes should spend time carefully working through the range of options with an open mind.”

“The detailed legislation around surplus will be key to understanding how to move forwards. Everyone can now feel understandably slightly ‘betwixt and between’.”

Ian Wright, Arc Pensions Law

McLaren added that TPR would likely need to consult on and publish more detailed guidance on endgame options once new legislative frameworks were in place. The Pension Schemes Bill is expected to include draft legislation around surplus release and superfunds.

“Although trustees have generally been positive about the growing surplus flexibility, clear guidance being shared to support decision-making is seen as a critical piece of the puzzle,” McLaren said. This is a helpful first step and hopefully signals TPR’s focus in supporting this evolving area at pace.”

James Patten, a partner in Aon’s endgame strategy team, welcomed TPR’s intention to set out more guidance and policies around run-on and surplus sharing. Aon’s research has found that only 17% of pension schemes had a view on how surplus could be shared.

“Surplus is likely to come under increasing focus from employers and member groups, whether or not a scheme chooses to run on or buy out,” Patten said. “Developing a clear policy now will help reduce the likelihood of challenge and regret risk in future.”

Ian Wright, technical director at Arc Pensions Law, said surplus release rule changes “may affect the way all parties approach endgame planning”.

“Trustees and employers should find the latest guidance helpful in approaching the new obligation to develop long-term journey plans, but frankly the detailed legislation around surplus will be key to understanding how to move forwards,” he said. “Everyone can now feel understandably slightly ‘betwixt and between’.”