09 January 2025
5 min
As trustees and sponsors of DB pension schemes consider where their schemes are going in 2025 and beyond, they might find that the time for making endgame decisions, and the range of options, could change quickly.
After so much legislative change in 2024, schemes will have to consider the Pension Regulator’s (TPR’s) new funding code and general code of practice – particularly the ‘own risk assessments’ that schemes need to undertake.
Trustees will also need to navigate the challenges of the investment landscape and will want to capture any opportunities created by the new government’s plans for pension savings.
We expect the risk transfer market to remain busy as more schemes insure liabilities. It’s important for any scheme approaching insurers to have ‘insurance-ready’ data – but good data is important to all endgames, and we’d like to see it get the attention it deserves in 2025.
It’s looking less and less likely that 2025 will be the year of significant DB legislative change. The outlook for a public-sector consolidator or a change to surplus rules is uncertain.
However, many schemes are evaluating their endgame options. Discussions around the topic show that there’s plenty of room for a range of endgames, including generating and capturing value, without legislative change.
If 2024 was the year of the strategic pause to look closely at different endgames, 2025 is shaping up to be the year when schemes start to implement a wider range of endgames than before. The buy-in market will continue to be very vibrant, but we’ll also see other solutions and strategies develop. The trade press is filled with examples of innovation, ranging from large buy-ins to run-on strategies. The industry is creating a wave of precedents and making these solutions more accessible.
Action: If you’ve got a preferred endgame, ensure you’ve got a clear view of the strategic rationale for it, and your level of conviction in the outcome. In a changing market, it can be helpful to consider what would make you change your views. You can then identify which parts of an evolving market are worth monitoring closely.
Annual totals of £40bn of liability transfer in the bulk annuity market seem to have become the new norm, and market forces appear to be functioning well at that level. Supply is catching up with the spike in demand from schemes over the past few years, to ensure that even small schemes can benefit from competition.
New insurers in the market will only help to improve this picture – we expect them to target the smaller end of the market initially, to build credibility. Royal London and Utmost have already written their first deals below £100m, and we expect much more from them in 2025, joined by Brookfield (subject to the insurance regulator granting permissions). We expect at least nine of the eleven insurers that will be active in the market in 2025 to be regularly quoting on transactions for schemes under £100m.
The market has continued to prove itself at the other end of the spectrum. Insurers can digest transactions at increasing scale, and we expect demand for large transactions to continue. Each scheme has its own nuances and complexities, so a large transaction is never going to be simple, but much of the thinking has been done and the ‘plumbing’ is in place. We expect insurers to continue to push the art of the possible.
Many schemes have already transacted full-scheme buy-ins and are now looking to convert these to buy-outs. Data challenges remain the main source of delay to buy-outs. The industry has resourcing challenges to meet the appetite for data work (including work in areas like Pensions Dashboards and GMP equalisation). Now is the time to consider the journey to preparing scheme data so any endgame can be executed without delay.
Action: 2025 is shaping up to be another significant year for the pension risk transfer market. It will pay for schemes to think ahead to their endgame and embark on a journey of preparation, particularly in data, right from the outset.
Schemes with a valuation in 2025 will be among the first that are subject to TPR’s new funding code of practice, which came into force last year.
The code requires schemes to formalise a long-term ‘low-dependency objective’ for funding and investment, and set a journey plan for how to manage risk to meet the objective. The funding code also requires a detailed covenant assessment. Trustees will need to give more consideration to factors affecting the employer’s future capacity to support the scheme.
One of the main tasks for trustees is deciding on the route to compliance with the code. A scheme can use the ‘Fast Track’ route if it meets certain tests, or go down a ‘Bespoke’ route. Nevertheless, all schemes will need to submit a new ‘statement of strategy’ as part of their valuation, which includes funding and investment strategy, along with ‘supplementary matters’ such as views on implementation and risks, scheme maturity, details of the latest actuarial valuation and any resulting recovery plan.
Action: Trustees should consider training to bring them up to speed with the code’s requirements and how to meet them, as well as building in time and potentially advisory cost for the extra work that might be needed. As schemes are required to set long-term plans as part of the actuarial valuation, trustees and sponsors can grasp the opportunity to review and refine these.
As funding levels continue to improve, companies with DB schemes have less time to settle on an endgame strategy. They might want a buy-out as soon as affordable, have a strategic pause or commit to run-on. Companies don’t need to work through all the detail, but many will need to develop their thinking in 2025, or they’ll leave their scheme trustees no choice but to make the decision on their behalf. Employers will need to be on the front foot.
The other issue for companies is retirement adequacy for employees and their general financial wellbeing. Evidence is mounting that these areas can affect all aspects of an employee’s wellbeing, but it doesn’t look like the government will give much guidance or direction any time soon. As companies grapple with these issues, while they try to mitigate fundamental inequalities such as the gender gap, the creative ones will be seeking solutions. Will we see collective DC and other innovative risk sharing arrangements come to the rescue?
Action: Companies need to clearly articulate a strategic vision for their DB schemes and the financial wellbeing of their employees. If they do this, they’ll be able to respond quickly to what is likely to be a rapidly changing retirement saving landscape.
TPR’s general code of practice is almost a year old, and it’s time for schemes to seriously consider their first ‘own risk assessment’ (ORA). The first ORAs will be due by 31 March 2026. They’ll look at the 2024/25 scheme year, and assess how effective policies and procedures are in areas such as core governance processes, investment governance and administration.
Trustees have been busy preparing over 2024, filling in policy gaps to ensure their ‘effective system of governance’ is in good shape, and thinking about further testing and assurance that may be required. A robust ORA-focused trustee effectiveness review is likely to be a staple for the evidence required, and some schemes have arranged for the sponsor’s in-house audit function to help with additional assurance. An important element is reflecting on decisions, particularly around investments and risk transfer, and the lessons from those decisions will help a scheme develop its governance.
Action: Schedule your ORA-focused trustee effectiveness session, and assess the requirement for additional assurance ahead of your first ORA.
The new government has wasted no time in announcing its bold plan to transform the UK’s pension regime by unlocking the potential of long-term savings for sustainable economic growth. DB schemes must reassess their investment strategies in relation to endgames.
The investment landscape poses its own challenges. Despite inflation slowing significantly, gilt yields and interest rates remain high. The US dominance of equity markets shows no sign of diminishing. Although funding positions for DB schemes are healthier than in previous years, market conditions in 2025 will require careful navigation.
Action: We urge trustees to keep considering the changing roles of their protection and growth assets, and how these could affect their schemes’ long-term success. We encourage trustees to recognise that a strong funding position or a surplus needs as much careful management as a weak funding position with a meaningful deficit. Over the next year, it will be important to assess investment of scheme assets through the lens of ‘rewarded risk’ rather than just ‘risk’.
Data is the queen of all endgames, so DB schemes should give it the respect it deserves. Running a DB scheme efficiently and effectively, like a successful business, means sorting the foundational element: the data that fuels the pension payments.
Getting and maintaining insurance-ready data is key for a buy-in, but good data is a must for all endgames, as well as Pensions Dashboards, GMP equalisation and a better member experience.
Action: Trustees should make a plan not just for their scheme’s endgame journey, but also for the data journey. By taking data seriously and embracing the potential of technology like AI, you’ll be better prepared for your endgame, whatever that may be.
If you have any questions on anything covered, please get in touch.
This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use.
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