Keeping on top of pensions now a ‘business essential’ for employers as endgame and surplus options continue to expand

In their latest report, Corporate pensions: More options, new opportunities - what next?, LCP highlights the need for employers to stay on top of pensions amidst rapid economic, legislative and regulatory change.

The report explores the key issues and opportunities that sponsors of UK pension schemes need to be aware of. Chief among these is the evolving legislative and regulatory framework around the use of DB surpluses. As surpluses become more widespread, material and enduring, and with a new surplus regime expected to come into force next April, sponsors are exploring how their pension assets could support wider business objectives while continuing to provide appropriate protection for members’ benefits.

LCP advises sponsors to take a number of practical steps, including setting a clear strategy for any future surplus and engaging with trustees at an early stage.

The report also highlights how the range of DB endgame options continues to grow. Sponsors and trustees now have more pathways than ever before and greater reason to be clear about the outcomes they want to achieve for both the business and their scheme members.

LCP argues that readiness should be the priority. While preparation does not commit a scheme to a particular endgame route, it gives sponsors and trustees the flexibility to act when the right opportunity arises. Rather than focusing on a single destination, schemes should establish a robust decision-making framework that preserves flexibility and allows the strategy to adapt as circumstances change.

Options including run-on, superfund transfers, sponsor swaps, capital-backed structures and insurance transactions can each offer a different balance between risk reduction and corporate flexibility, upfront cost and future value, access to surplus, accounting outcomes, member security and governance requirements.

The report also outlines how to ensure that pension schemes invest in line with their endgame strategy, as well as 6 top tips on how to make the most of current market conditions, and last but not lease the evolving approach to investment governance.

Other key themes highlighted in the report include:

• DC, CDC and the future of pension provision - With most employees now relying primarily on DC pensions, employers should consider whether their current arrangements are likely to deliver the retirement outcomes they want for their workforce. CDC has the potential to improve retirement income for a given level of contribution. Against this backdrop, strategy on future pension provision should be moving up the corporate agenda.
• DC reform moves centre stage - A significant programme of reform is underway in the DC market, designed to improve value for money, encourage greater scale, broaden investment opportunities and provide more support for members as they approach retirement. These developments matter to sponsors even where day-to-day responsibility for pension provision has been outsourced to a master trust or pension provider. Sponsors need to understand the direction of travel of their provider, assess their retirement proposition and review how default investment strategies are evolving.

Dev Gandhi, Senior Consultant, LCP, commented:

"Employers should be looking both backwards and forwards on pensions. For legacy DB schemes, the priority is a clear endgame strategy, supported by the right trustee and investment governance. For future pension provision, CDC should be considered alongside DC, with the focus on the retirement outcomes each could deliver for employees.

“Across both, don’t lose sight of the regulatory changes and market developments and risks. The aim should be not simply to keep pace with change, but to turn it into better outcomes for the business and its people."

Gordon Watchorn, Partner and Head of Corporate Consulting, added:

"For the first time in history, with well- funded DB schemes and more flexibility than ever, now is a time for DB schemes to support sponsors after decades of the reverse.

“Well designed and managed frameworks can provide protection for members whilst providing significant value to sponsors and a return on investment – whether that be getting rid of pension risk all together to free up resources and management time or an intentional strategy to access value from the scheme over time.”