Sponsor refund is a key consideration alongside member outcomes, LCP industry poll finds

Pensions & benefits Endgame strategy and journey planning DB pensions

In a recent industry poll, only 1% of respondents said that member benefit security was the only factor relevant to scheme strategy decisions, reflecting the new world of DB surplus strategy. The upcoming changes to surplus regulations mean this is going to be a focus area for most of our industry over the coming months and years.

During a session on endgame innovation at LCP’s recent DB Conference, attendees were asked what factors trustees should take into account in setting scheme strategy. Over 80% of the audience concluded that potential for member upside should be considered as part of strategy decisions. Over 60% thought that potential for sponsor refunds should also be taken into account. Close to 20% thought that, in addition, Trustees should also consider their impact on wider factors, such as the prospects for UK growth and the gilt market.

The session, titled ‘Endgame after Stagecoach: what is now possible, credible and attractive?' outlined the growing range of endgame options available to DB schemes, and how trustees and sponsors can work out which may be most appropriate for their particular circumstances. It highlighted that DB pensions are in a period of rapid innovation, creating new opportunities and choices for schemes. These include more established routes such as buy-out and low-risk run-on, as well as emerging options including superfunds, sponsor swaps, captives and new forms of run-on.

LCP’s Steve Hodder urged trustees and sponsors to give any decisions careful thought. Different options can offer very different outcomes in areas such as benefit security, sponsor risk, member and sponsor upside, governance and administration. What is attractive for one scheme may not be right for another, depending on factors including scheme size, funding position and the strength of the sponsor covenant.

The pace of innovation for DB scheme strategies is to be celebrated. It is opening up new opportunities for schemes, many of whom are reassessing their options from a position of strength.

As the poll highlighted, sponsor refunds and improvements to member benefits have become prominent considerations for schemes we work with, alongside the established priorities of benefit security and effective administration. Many sponsors will see well-funded schemes as an opportunity to get a return on their investment having paid material deficit recovery contributions over decades. But there is no single ‘right’ answer. Trustees and sponsors need to consider the full range of implications carefully and determine which endgame route delivers the best outcome for their own circumstances.

These decisions matter not only for members and sponsors, but for the wider UK economy too. The assets of UK corporate DB schemes are equivalent to the second largest global sovereign wealth fund and invest in around 40% of the UK gilt market. This strategic importance is one reason behind the Government’s DB pensions reforms and ongoing regulatory support for innovation.

Steve Hodder LCP Partner