Effective endgame strategies could secure up to 65% cost savings for DB sponsors

Companies could cut the cash cost of their defined benefit (DB) pension scheme by up to 30 per cent by implementing a bespoke endgame strategy instead of "following the herd" down The Pensions Regulator’s (TPR) fast track route, according to analysis by Hymans Robertson.

The modelling showed that if a company was able to pledge security to adopt a corporate focused or bespoke approach, they could reduce best estimate cash costs by up to 30 per cent compared to following the expected fast track retirements.

It suggested that this approach could also save as much as 65 per cent when compared to a route that might be followed by the trustees if the company does not properly engage with the endgame discussion.

In addition to this, Hymans Robertson noted that schemes taking a bespoke approach would also benefit from more time to recover from any funding shocks.

The firm emphasised, however, that the responsibility is on the company to work with their trustees to ensure all options are explored, as head of corporate DB endgame strategy, Leonard Bowman, said that with an "array of decisions to be made it is vital that they plan strategically and carefully and seek expert help in these final stages”.

He stated: “If the company wants to intelligently manage its pension costs and risks over the lifetime of the scheme, then simply having a long-term funding objective is not enough.

"A holistic strategy and associated governance framework needs to be planned and put in place, as the long-term funding objective is only one piece of many in the DB endgame jigsaw.

“Our modelling sought to find out the costs of schemes taking different paths along this journey and stark differences can be seen. With cash cost reductions of around 30-65 per cent it is clear that taking the wrong path, making a poor choice and failing to execute these final stages in the best way could lead to significant extra cost.

“Companies need to look carefully at the value that offering security can bring. If this means a move away from fast track becomes feasible, then by providing the trustees with greater long term comfort, in a way that is not just linked to the company covenant, our modelling shows the significant economic value that can be generated for corporates.

“Improved security can support longer recovery plans. It can also prevent any short-term fluctuations that a scheme experiences from disrupting long term funding and investment strategies."

Bowman said that seeking expert guidance when facing these "momentous decisions" can help companies ensure nothing gets missed, emphasising that ensuring all options have been considered will also help maximise cost savings.

“It is important that the right ‘customised’ endgame strategy is developed to meet each company’s specific objectives," he continued. "Just as importantly, the company must execute the strategy effectively, to ensure it remains on track and that future opportunities are taken as they emerge."

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