Ongoing market innovation has led to a wider range of financial, governance, and insurance options for schemes
The Pensions Regulator (TPR) has issued comprehensive guidance on endgame options for trustees and sponsors.
The guidance - New models and options in defined benefit pensions schemes – comes after the government's response to its Options for Defined Benefit (DB) Schemes consultation, setting out its plans to ease restrictions on scheme surpluses, and at a time when a number of new options are emerging for DB endgame planning.
The guidance covers all endgame options from run-on to buyout, plus alternative options like superfunds and capital backed solutions. TPR also comments on wider areas such as governance and sole trustee models in the context of endgame strategy.
TPR said that, for all the options highlighted in its guidance, it expected trustees to seek appropriate and proportionate professional advice; assess the impact of the option on the strength of the covenant to the scheme; and understand the extent to which any option entailed some loss of trustee control, taking appropriate advice to ensure compliance with their fiduciary duties.
It said trustees should also conduct a full risk assessment as well as a stress test of the preferred option.
The regulator noted trustees should additionally make sure they understand if and how any arrangement entered into could be unwound and the potential implications of doing so.
Commenting on the guidance in a blog, TPR interim director of policy and public affairs, Patrick Coyne said: "Ongoing market innovation has led to a wider range of financial, governance, and insurance options. Each have their own pros and cons. 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."
He added: "While the path to buy-out is well-trodden, running on - and potentially releasing surplus - is a new consideration for many DB schemes. And for those schemes with scale and high governance standards, that have the right combination of employer covenant strength and funding level, it could be an option to consider.
"Surplus release won't be right for everyone. Nonetheless it is right that well-run, well-governed and, crucially, well-funded schemes can consider releasing surplus, should they wish. And it's right that our latest guidance goes into more depth to support trustees in considering the range of options."
Timely and welcome guidance
LCP partner and head of endgame innovation Jonathan Griffith said: "With so much recent innovation and policy development, there has never been so much choice and flexibility in DB endgame planning. Whilst clearly a good thing, this means that trustees and sponsors now have much more to consider when reviewing their scheme's endgame strategy. In that context, this is timely and welcome guidance from the regulator, who are encouraging trustees and sponsors to properly consider what is right for them, their scheme, and the members rather than risk going down a route that may not meet objectives."
"The guidance on running-on a pension scheme is especially timely in light of the government policy announcements relating to DB surplus, and there the baton now passes to trustees and sponsors to plan for the anticipated new rules and guidance. Whilst we have implemented many run-on and surplus sharing agreements to date under current guidelines, we expect to see even more focus in this area under the government's new proposals."
Arc Pensions Law technical director Ian Wright added: "While there is nothing radical here, it sees that recent government announcements around potential surplus release may affect the way all parties approach endgame planning, although at this stage the regulator is, in effect, reserving its position pending the necessary legal changes. However, there is a clear recognition that the pensions landscape is still shifting, and that its regulatory approach will need to evolve accordingly to keep pace.
"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. Everyone can now feel understandably slightly betwixt and between."
Hymans Robertson head of DB scheme actuary services Laura McLaren agreed: "Landing closely behind last week's DB options consultation response, and ahead of the hotly anticipated Pension Schemes Bill, the guidance looks set to be the first in a series of instalments and reiterates the government's desire for progress within this area.
"As the legislative landscape evolves, TPR will need to consult and publish more detailed guidance on the factors that trustees should take into account when deciding whether to utilise the new statutory override power and when designing a framework for ongoing surplus release. 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. This is a helpful first step and hopefully signals TPR's focus in supporting this evolving area at pace."
