Significantly improved funding levels and bulk annuity options have brought forward the need for defined benefit (DB) trustees to renew their focus on endgame planning.
Schemes must urgently begin thinking about how they bring together investment and funding policies to target a specific end-game solution, whether that be self-sufficiency, buyout, or consolidation, Redington said.
In a report published today (24 October) by the consultancy's Ampersand Institute, Redington said trustees need to adopt a decision-making framework, focusing on funding and investment policies, as well as sponsor covenants, to consider how best schemes can reach a point where they can pay the full value of pensions.
Put simply, Destination Endgame sets out how schemes should set firm objectives of where they want to get to - understanding the full range of endgame options and how far away they might be - and a "reliable method" for deciding the eventual solution.
Speaking to PP, Redington head of DB Dan Mikulskis said events over the last two years, since the referendum on Britain's membership of the European Union, have caused dramatic changes across the DB landscape.
"If you look back to 2016, when the Bank of England cut rates, gilt yields were down at 1%, and there were really quite big deficits, funding has really come on a long way, which is really good news," he said. "At the same time, you've had buy-in pricing getting competitive [and] new entrants into that market."
He noted regulatory changes, the development of a DB consolidation market, the government's DB white paper, and the introduction of a special Pension Protection Fund (PPF) levy for schemes without a substantive sponsor - SWOSS, as Redington calls it.
"We are now calling for a new paradigm - it really is the time to be looking at endgame right now."
Such a framework should also consider the scheme's probability of paying all pensions, a metric developed by Redington and titled ‘POPP', which combines a scheme's funding and investment policies to produce a simple figure to demonstrate the scheme's chances of success.
Under this measure, schemes with a diversified strategy - where liabilities are fully hedged and assets are invested in a broad range of strategies - the POPP, on average, increased from 75% to 99% between September 2016 and June 2018.
"This measure is really helpful for big-picture planning," Mikulskis said, "especially around actuarial valuations, because of that interplay of funding and investment.
"It gives a good jumping-off point or platform for having those conversations around [endgames] and looking at additional security."
Further, with the rise of a DB consolidation market, Mikulskis believes that such vehicles can be an endgame option or act as a stepping stone to a scheme's preference.
For example, The Pension Superfund and TPT Retirement Solutions have a self-sufficiency-based structure, while Clara will seek a buyout solution.
"Fundamentally, we think consolidators can improve member security and improve member outcomes," Mikulskis said. "We'd expect that they're going to be an enduring feature of the endgame landscape."
The number of defined benefit (DB) scheme members with benefits protected by an insurer will double by the middle of the decade, according to Lane Clark & Peacock (LCP).
Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.