Majority of schemes considering wider strategic priorities alongside member security, when setting their endgame strategy

Stronger funding levels, higher yields and new market solutions mean that schemes now have far more choice when setting endgame strategy – it isn’t a simple binary choice between run on and buy out.

During a recent webinar, LCP gave some practical help and advice to trustees and sponsors who are navigating these choices – highlighting the importance of clearly setting out strategic drivers at the outset (eg member security, level of member benefits / potential for augmentations, value for money in risk transfer and illiquid asset exists and managing accounting implications) and their relative priority for both the sponsor and Trustee.

The importance of understanding relevant factors (eg balance of powers in Scheme Rules, strength of sponsor covenant, Trustee and sponsor risk appetite) was also raised – noting that these scheme specific factors may mean that certain endgame options are not viable routes, or that a different approach may be required.

The webinar covered a number of case studies, including the recent acquisition of the Stagecoach Pension Scheme by Aberdeen – with LCP Partner Steve Hodder sharing insights on the key strategic drivers which motivated the Trustee, Stagecoach and Aberdeen to reach agreement to pursue this endgame strategy. And the relevant factors which shaped the run-on agreement reached between Aberdeen and the Scheme’s Trustees.

The webinar concluded with a poll in which attendees were asked how they would be prioritising their strategic objectives. 45% indicated that benefit security remains the strategic priority, while the remaining 55% indicated that benefit security was just one important factor alongside others such as opportunities to improve member benefits and potentially return surplus to the sponsor. This highlights that the new endgame options open to schemes means that Trustees and sponsors are now able to consider other approaches and to consider them in the context of a broader set of strategic priorities.

Laura Amin, LCP Partner commented: “The fact that 25% of our webinar registrants were ‘undecided’ on their scheme’s endgame strategy, suggests a significant number of schemes are currently navigating the increasing range of endgame options. With more routes available than ever, there’s no one ‘right’ answer for schemes. What matters is a disciplined, joined-up approach – agreeing strategic objectives upfront so that all options can be assessed against these and with an understanding of what scheme specific factors might favour one route over another.. in this context, run on, insurance and consolidation can each deliver strong member outcomes which are aligned to the Sponsor’s and Trustee’s objectives.”

David Fairs, LCP Partner, added “While there is no ‘preferred’ endgame option from a regulatory perspective, TPR will expect schemes to think carefully about their specific circumstances and be able to set out a clear rationale for their endgame strategy. With the pace of change in the market – as evidence by the Stagecoach deal and with some insurers and superfunds now offering ‘value share’ transactions - DWP and TPR will be keeping a keen eye on developments and we may see further guidance in due course. This may help those schemes who remain undecided on strategy – albeit there is the risk for these schemes of missed opportunities which in itself is a risk to manage.”