Defined benefit (DB) pension schemes are keen to understand endgame alternatives to traditional buy-ins and buyouts as the de-risking market continues to grow and DB scheme funding improves, according to industry experts.

Speaking at a session at the PLSA Annual Conference 2022, Aon partner, Paul McGlone, noted that there were other options for DB pension schemes that find themselves fully funded on a buyout basis.

While caveating that for most schemes the traditional buyout option was most logical, McGlone pointed to the emergence of DB superfunds a few years ago as one of the first endgame alternatives for schemes.

“We’re still waiting to see the first transaction, but we do have an assessment regime in place and one regulated superfund,” he stated.

“It’s been interesting to see not just the difference in the two business models we’ve seen, but also speculation about how many other types of business models might there be for superfunds who think they can make money by running on our pension schemes.

“Hot on the heels of superfunds we saw the first capital-backed journey plan in 2020. We’ve seen a couple of products that Legal & General are talking about, each of which protect schemes in different ways but are not buyouts or buy-ins.”

McGlone explained that these new products and solutions were coming along due to the recognition that the pensions industry has “a wall of money” arriving and several schemes are reaching full funding.

He continued: “There are a lot of organisations outside of the insurance arrangements looking in and going: ‘You know what? We could make some money out of that. Why don’t we step in and offer something that’s an alternative?’

“All of these innovations have caused sponsors to step up and say: ‘If all of these organisations can make money by running my pension scheme, why can’t I make money from running my pension scheme?’ The short answer is, in many cases, you can. And there are various ways of doing it.”

McGlone explained that this can be done by simply carrying on running the scheme, even though there is enough money to buyout.

“The first version of that is you just keep going. You carry on generating return and you build up a surplus,” he said.

“That surplus, ideally, grows and grows until, some point in the future, you decide to buyout. At the point you decide to buyout, that surplus is available for some combination of the sponsor and members to use.

“A variation of that is that you agree an arrangement where that surplus is not just rolled up to the final stage but is extracted from time to time, and that’s harder. It’s not something you just switch on overnight, but it’s possible in the right circumstances.

“One of the really interesting ideas if whether you can use DB surplus to fund DC contributions [if there is a DC section]. Lots of checks and balances around it, but if you can do that it’s very tax efficient.”

The audience were then asked whether their scheme or sponsor had already considered or been trained on any of the ideas outlined in the session.

Almost half (49 per cent) said they had not, 40 per cent said they had but only one or two of them, and 10 per cent said they had considered most of them.

When asked whether they thought what the thought about the idea potential impact on endgame options, 2 per cent said they were unsuitable, 16 per cent said they would be possible only if buyout wasn’t an option, 42 per cent said they were intrigued and needed to understand more, 13 per cent were neutral and 26 per cent though they should be widely considered and used.

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