‘Endgame limbo’ increases risk and creates missed opportunities for DB schemes

Trustees and sponsors who delay decisions about their long-term scheme objectives could miss investment opportunities or expose themselves to unnecessary risk, warns Hymans Robertson as it publishes its latest Excellence in Endgame paper ‘Endgame planning: out of limbo, into action’. 

The leading pensions consultancy stresses that every endgame choice – from buy-out to run-on to consolidation – should work in tandem with the chosen linked investment strategy. If trustees and sponsors delay endgame decisions, the investment strategy can become adrift, storing up problems for the future. 

Schemes without a joined-up plan are at risk of holding asset portfolios that don’t meet their needs or represent unnecessary investment risk. This can have longer-term consequences, restricting the ability to make changes at a future point in their endgame journey. However, the firm advises there are immediate steps that trustees and sponsors can take to avoid so called ‘endgame limbo’.

Commenting on the need for schemes to take that vital first step when considering their endgame, Ross Fleming, Partner, Hymans Robertson, said:

“All schemes are different, and each one has to find their individual best path through regulatory change, while at the same time bringing key stakeholders on the journey. The range of options on the table, and the perceived complexity, can be daunting for even the most focused trustees and sponsors. But schemes that delay decision-making may be missing out on opportunities or taking unnecessary risk, as a by-product of their delay. This is a pivotal moment for those schemes keen to begin their endgame journey ending their ‘endgame limbo’.

“There are ‘no regret’ actions a scheme can take to manage these risks and help make future decision-making smoother. Buying out is the one endgame choice that really constrains an investment options, so ruling this in or out as an option, is one such step. Schemes that can get into the detail of their portfolio’s liquidity, understand exactly how quickly assets can be converted into cash, and how easily the portfolio could adapt to different future scenarios are at an advantage
“The importance of not leaving decisions to the last minute cannot be underestimated. Trustees and sponsors may have different opinions on what is right, what is best for members and how to reach such decisions, but striking a common ground between the two groups is key – and at speed. Waiting for a universal agreement can come with its own costs.” 

Russell Chapman, Partner and Head of Investment Risk Transfer, Hymans Robertson, added:

“Endgame options can influence the investment strategy that is needed to support, particularly where liquidity is important or a risk transfer transaction is concerned. We encourage trustees to think about the bigger, and wider picture, as managing changes effectively can deliver significant savings and value for money in both the short and long term. From our experience, the most successful journeys to buy-out are built on deliberate decisions, a unified and clear sense of direction and an investment strategy that is flexible and able to evolve as objective become clearer.”

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