Hard balancing act of competing aims when selecting an endgame investment strategy for DB schemes

DB schemes’ run-on objectives must be reflected in their investment strategy as part of endgame planning, says Hymans Robertson as it releases it latest Excellence in Endgame paper. Skipping this step can increase the likelihood, and risk, of future underfunding. Collaborative decision making between DB sponsors and trustees needs to be nurtured for alignment, setting of stakeholder expectations and consideration of a range of viewpoints. 

Flexibility is key when selecting a run-on strategy and DB schemes must have enough freedom in their choice, that insurance can always remain a possibility if things change. Ensuring that flexibility remains an option can be helped by a number of actions – including limiting liquidity and maintaining buyout ready operations and member data – allowing a switch to insurance, if desirable, at a future point.

Commenting on the factors that DB schemes must consider when aligning on their endgame, Calum Cooper, Partner and Head of Pensions Policy Innovation, says:

“In order for trustees and employers to define an endgame strategy for their circumstances, there are a number of competing considerations that must be worked through. Our paper outlines key factors to consider when defining your core asset and surplus sharing strategy. For example, it’s really important to define your strategy for longevity risk as the next decade will be different. Real scenarios and interactive modelling can help bring this alive and save a lot of time and effort. 

“There’s no perfect time to start sharing surplus. Trustees and sponsors will need to balance their needs, wants and tolerances of stakeholders and of course, the final decision must ultimately be right for the members. For example, the longer you take to build reserves before distributing surplus, the higher the level of return and surplus share which can be targeted. This opens the possibility for a wider range of asset classes – for example illiquid assets may be a more attractive option. But it also changes who gets what.

“And finally, external considerations must not be forgotten. Changing legislation and guidance from both the Department of Work and Pensions (DWP) and/or the Treasury may influence how you chose to share value. This is not straightforward territory. But with £100bns of surplus capital in DB schemes, the scale of the positive impact on members lives, sponsors businesses and the UK economy is such that the territory is worth travelling. The delicate balancing act of defining a productive and dynamic run on investment strategy for the journey cannot be underestimated.” 

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