Marvin OnumonuA change in key trustee or company stakeholders can affect a defined benefit (DB) pension scheme’s endgame investment strategy, according to Hymans Robertson.
The firm warned that personnel changes could transform the objectives a DB scheme aims to achieve.
In the latest update to its ‘Excellence in Endgame’ series, the firm outlined various scenarios, changes in stakeholders, sponsor covenant, and fluctuations in delivery costs, that could alter the original endgame plan.
Hymans Robertson emphasised the need for a DB scheme’s endgame target to align with the correct investment strategy.
This alignment allows for necessary changes and potential pivots.
Establishing a decision-making framework is crucial for building resilience and flexibility, as changes can occur in two ways.
The first pathway is a pivot to buy-out for schemes currently running on, while the second option is a shift to run on for schemes planning for buy-out.
Ben Fox from Hymans Robertson said: “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 noted that, in some cases, DB schemes may decide to switch from run on to buy-out.
This change would affect several key areas, including liquidity levels, asset types held by the scheme, the quality of member data, and longevity risk.
Fox added: “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.”
