open navigation close navigation Menu
DB Pension Schemes Face Barriers To Achieving The Endgame

DB Pension Schemes Face Barriers To Achieving The Endgame

Thursday, 7 March 2024

With the vast majority of defined benefit pension schemes now closed to new entrants or to further accrual, we are entering a new phase in the DB market. With many schemes now approaching the final stages of their lives, trustees are considering their endgame options.

According to recent research from Standard Life, 50% of DB pension scheme trustees now have a clear endgame strategy compared to 48% who do not. And, as we mentioned in a previous article, earlier research (also from Standard Life) revealed that the vast majority (86%) of trustees anticipate approaching an insurer for a Bulk Purchase Annuity (BPA) transaction within the next five years.

Even though so many schemes are now focusing on their endgame strategy, many admit they are still facing significant barriers to de-risking. In this article, we’ll explore some of the obstacles DB pension schemes are encountering as they enter maturity.

Market volatility

The Standard Life survey found that 40% of pension scheme trustees said that market volatility was a key barrier to pursuing their endgame strategy.

It’s unsurprising that market volatility is so high up on trustees’ list of concerns, with the fallout of the 2022 gilt crisis still fresh in everyone’s minds. The market turbulence that followed September 2022’s mini-budget unveiled the underlying weaknesses in the liability-driven investment (LDI) strategies many schemes had been using to manage investment risk – but which instead led to soaring gilt yields and a bailout courtesy of the Bank of England.

Issues with their investment strategy

With so many DB pension schemes previously relying on LDI investment strategies, it is little wonder that 36% of DB pension schemes say that issues with their investment strategy are a key barrier to pursuing their endgame plans.

The gilt crisis has led many trustees to see the need for a more diversified and considered investment strategy that is better able to weather market storms.

Commenting in Pensions Expert magazine, Paul Wood, founder of C-PAID, said,


Pension schemes are now more inclined to adopt strategies that allow for a degree of flexibility, facilitating a more dynamic response to market fluctuations.

He continued, “There is a growing recognition of the need to diversify investment portfolios to include a broader range of assets, including alternative investments that were previously considered too risky or unconventional. This shift is driven by a desire to hedge against the kind of risks that precipitated the LDI crisis, creating a more resilient portfolio that can withstand shocks in the future.”

Lack of sponsor engagement

Next up, 32% of DB trustees cited a lack of sponsor engagement as an obstacle to achieving their endgame strategy.

It’s a view that appears to be shared by some parties in the industry. A recent press release published by LCP asserted that many sponsoring employers view DB pension schemes as a ‘millstone around their necks,’ with de-risking and buyouts seen as the best route to rid themselves of the burden they represent.

However, in the period of high funding levels we now find ourselves in, LCP has called on sponsors to engage more with their pension scheme and take an active interest in ensuring it is on the right course to reap maximum benefits for its members. Sponsors now have, LCP insists, a ‘once in a lifetime opportunity’ to review their endgame and do more for scheme members.

Gordon Watchorn, who authored the LCP report, said, “In this environment of unprecedented funding levels when there are now more options for sponsors, it’s time to be more innovative and bold and to keep the strategy under constant review.”

The new DB funding code

Due to come into force on 1 April 2024, the draft DB funding code is designed to ensure that pension savers get the income they are promised from their pension. To achieve this, it will set out new ‘low dependency’ rules for mature schemes to reduce their reliance on the sponsoring employer for contributions; instead, the cash required to pay members should flow from investments. The code will compel scheme sponsors and trustees to clarify how they intend to de-risk in order to achieve low dependency status.

Depending on the current investment strategy and maturity of the scheme, the shift to low dependency could be considerable for some schemes, which is undoubtedly why it is viewed as a key barrier to their endgame by 26% of trustees.

However, Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance at Standard Life, doesn’t believe that the code will pose a significant problem for most schemes. “In practice”, he said,


most schemes are likely to be complying with the principles set out in the code already, and with the minimum requirement for sponsors to be maintaining full funding for significantly mature schemes, it is possible that sponsor engagement improves and reduces that barrier for trustees.

Attracting insurer interest

As an increasing number of schemes set their sights on buy-ins and buy-outs as their endgame strategy, concerns are growing that insurers may not be interested in, or indeed have the capacity to cope with, the growing numbers of schemes approaching them. Indeed, 45% of DB scheme sponsors who have buyout as their endgame strategy are worried about a lack of insurer capacity or interest, according to research from Hymans Robertson.

And it’s an issue that 20% of DB trustees saw as an obstacle to achieving their endgame, according to the research by Standard Life.

General preparedness and issues with data

When queried on the key barriers 20% of trustees felt general preparedness was the primary challenge, with data being seen by 18% as the main hurdle. These are areas that EQ, as a trusted pensions partner, can assist schemes preparing for their end game.

This is something that was recently commented on by PwC’s Head of Pensions Funding and Transformation, John Dunn, speaking to Pension Age. He said,


Many DB pensions schemes can now afford insurance due to improved funding levels, but few have their ‘house’ in order and records ready for a transaction. One area that we see needing focus in almost every insurance transaction is the data the scheme holds on its members.

Standard Life believes that preparation for buyout continues to be a ‘vital factor’ in any scheme’s de-risking strategy. It said, ‘For those schemes with accelerated funding levels, the choice may be between whether to look to secure a bulk annuity transaction now or pause and invest in the administrative and preparatory work.’

When it comes to the data DB pension schemes hold on their members, there are several issues  often seen. According to the Pension Administration Standards Association, schemes are struggling with problems including:

  • Multiple systems with inconsistent data
  • Data held in archives or microfiches as opposed to digital systems
  • Missing or inaccurate data.

Not only can missing data make it difficult to trace the members of DB schemes – it can also lead to inaccurate funding calculations, resulting in under or overestimations of liabilities.

Helping you overcome the barriers

EQ has been working with pension schemes, members, managers and trustees for almost 200 years, assisting them with all their pension administration needs and helping to solve the barriers that stand in the way of delivering the promised benefits to DB scheme members.

Our Data Services team have dedicated and skilled resources which focus on improvements in data cleansing and benefit rectification tasks that are directly linked to the challenges faced during buy-in, buy-out and de-risking plans. Having a strong track record in delivering complete end-to-end solutions in these areas, such as:

  • The outset of identifying data inaccuracies, with regular system updates and quality reports
  • Reviewing Sample members and producing technical notes based around confirming members benefits calculated from first principles to ensure no systematic problem exists.
  • Using our in-house technology solutions and skilled calculation experts to identify and rectify member and data anomalies or missing data. Whether that be from member tracing to more member and scheme specific data accuracy and calculation objectives such as GMP Rectification, GMP Equalisation, contingent spouse calculations or full benefit reconstruction and re-tranching.
  • Confirming payroll amendments and communications to members to support these activities.
  • Detailed trustee and client updates, with clear reporting and delivery plans to ensure a successful and partnered approach resulting in improved overall data quality and accuracy.

We use advanced technology and cutting-edge data solutions to manage the challenges inherent in administrating pension schemes, offering support with de-risking strategies, buy-in and buy-out and bulk annuity administration.

If you are looking for support from a trusted pensions partner, we’d be delighted to help.

Find out more about how EQ Retirement Solutions is transforming the retirement and pensions markets with leading administration and technology solutions.

Retirement Solutions Talk to us today