DB: Is there a new end game?

1 May 2019

Lesley Carline is president of the Pensions Management Institute (PMI).

Defined benefit (DB) pension scheme arrangements appear to go on forever, but in the words of Freddie Mercury: “Who wants to live forever?”

We are often told that DB schemes have a long way to go, even those that are closed will not be finished until that last pensioner or dependent dies. Increasing complexity together with significant financial liabilities, mean many sponsoring employers make no secret that they would prefer to offload the DB scheme, but how should they do this?

Traditionally it would involve transferring the assets and liabilities to an insurance company via a buyout. The sticking point is affordability. Insurance companies have strict rules around capital reserves and the cost of a buyout is not cheap. For many it is beyond their reach and the journey towards buyout continues. Others choose to do a phased approach, buying out pensioners, then deferred, then active members (if they have any left).

At present the buyout market is buoyant and we are being told that it’s a buyers’ market and insurers are being more selective in business they pitch for. There are alternatives to buyout and they are worth considering. They will not suit everyone, but they may be right for certain schemes and circumstances.

The first is the re-emergence of the DB master trust, long forgotten but now being dusted down and looking for schemes to assimilate.

Whilst the employer may not offload responsibility for the liabilities, they do gain certain advantages. Cost sharing is the most obvious along with sharing the governance burden with one trustee board, one set of lawyers, advisers, and so on.

The other is embracing economies of scale when it comes to investing and purchasing power. Then there is the ability to invest in funds and strategies that may not ordinarily be open to smaller schemes with fewer assets. And, of course, unlike buyouts, schemes do not have to be fully funded to be considered.

Another option on the near horizon is the consolidators, such as the Pension Superfund and Clara. They are slightly different models, but they do take on the liabilities and responsibilities for the scheme transitioning.

An advantage over buyout is that the schemes do not have to be funded to the buyout level, which may make it attractive to employers who have some money, but not quite enough. However, whilst the main aim of these schemes is the security of member benefits, they do not provide the same cast-iron guarantee that an insurer provides.

There are advantages and disadvantages with each model but employers have a choice, and if they do not want to go down these routes, there is always the opportunity to target self-sufficiency instead.

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