DB Endgame plans must allow for flexibility warns Hymans Robertson

A change in key Trustee or Company stakeholders can significantly impact a DB Pension Scheme’s endgame investment strategy, says Hymans Robertson. It warns that a change of personnel can transform the objectives the DB scheme is trying to achieve. As the firm releases the latest update to its Excellence in Endgame series, it outlines several scenarios – change of stakeholder, sponsor covenant and even fluctuations in the cost of delivering endgame – which can transform the original endgame plan.

The leading pensions and financial services consultancy reiterates the need for a DB scheme’s endgame target to be matched by the correct investment strategy, allowing for a change and potential pivot to take place. Having an established decision-making framework in place is vital to build in resilience, and flexibility, with changes likely to incur in two ways. The first pathway set out in the report is a pivot to buy-out for those schemes currently running on. Alternatively, the other route considered by the firm is a change to run on for schemes currently planning on buy-out.

Commenting on the need for DB schemes to remain flexible, Ben Fox, Hymans Robertson, says:

“While many DB schemes may have detailed plans for their endgame journey, few consider an alternative and have plans in place if a significant change – to team, to budget, or to regulation – takes place. Confidence in the original endgame plan can only be improved by building in ‘what-if’ assumptions if circumstances are to change. Our paper provides insights into what must be considered to allow schemes to smoothly implement a change, if and when, needed.

"The firm emphasises that in certain circumstances, DB schemes may choose to change from run on to buy-out. In this scenario this would impact a number of key areas – the level of liquidity, the type of assets held by the scheme, the quality of the member data and longevity risk."

Commenting on DB schemes choosing to change their endgame journey from run on to buy-out, Ben says:

“Setting an investment strategy under the assumption that buy-out could happen at a future point will, by default, lead to a more buy-out focused plan. However certain considerations must be accounted for, for example illiquidity concerns, to ensure sufficient flexibility if buy-out is to become an option at a future date. 

“Having this built into the investment strategy from the beginning, and liability data in a place where it is buy-out ready, gives confidence to stakeholders that this could be quickly used if needed. This may reduce the funding buffer that needs to be held before distributing surplus to stakeholders under run on in the meantime.”

The Hymans Robertson Excellence in Endgames insights hub and decision-making tree can be found here.