Buying out is expensive, so therefore eliminating the need to make a one-time premium payment for the transfer of liabilities to an insurer should deliver immediate and longer-term savings. Moreover, many now recognise that the sums on offer from DB scheme surpluses that flow back to the corporate, as well as to scheme members, could ultimately prove transformative for a business
Stepping up governance ahead of a run-on strategy
However, for those schemes considering a run-on strategy, a new paper warns that the importance of governance must be considered. It suggests three governance perspectives ought to top the agenda: day-to-day challenges, shareholder interactions and alignment with trustee boards, as well as ensuring all stakeholders have a clear understanding of what a run-on strategy could involve.
Commenting on the paper, Sachin Patel, Senior Actuarial Consultant at Hymans Robertson says, “When a company is considering run on, it is vital that the appropriate governance is considered... Run on can be transformative for DB schemes but to ensure the smoothest transition, it is imperative that consideration is given to the potential changing of dynamics between a business, and its pension scheme.”
Day-to-day challenges
The paper suggests that where a company plans to develop a successful run-on strategy, and generate a material surplus, thought will need to be given as to how the pension scheme interacts with current forecasting of the wider business. For example, the scheme could be thought of as a division or subsidiary of the broader business, with its own reporting lines. As Patel notes, “This will bring about complex changes to reporting lines and interactions that will need to be reviewed annually as a minimum.” For example, various key performance indicators and scheme metrics could be introduced that cover the following areas:
- The scheme’s funding position relative to any minimum surplus sharing thresholds
- Projected future surpluses
- The likelihood of a future downside risk event occurring
- Pension circumstances relative to the Pension Act 2021 requirements.
Shareholder interactions
Companies will need to give plenty of thought to how shareholders and the wider external market will react or change their approach to an organisation that opts to run-on their DB pension scheme. Shareholders and the external market will be especially keen to understand what protections are in place against the downside risks.
Therefore, to help ‘convince and educate’ shareholders and third parties of the viability – and ongoing success – of the run-on strategy, the company will need to develop clear messaging around the robustness of the strategy in place; comprehensive information on the scheme’s risk profile; details of any protections against downside risks (particularly black swan events); and an idea of the potential upside to shareholders and the external market. As Sachin Patel explains, “It’s vital that shareholders are left feeling assured of the strategy adopted and how this will change the business profile.”
Alignment with trustee boards
Corporates and trustees (as well as any scheme advisers) will need to adopt a collaborative working approach and framework. The role of professional trustees and diversified trustee boards could prove to be key issues for a long-term run-on strategy. Otherwise, complications arising from ageing member-nominated trustees and lack of diversity amongst trustee pools may present further challenges over the coming years.
Patel notes, “There must be complete agreement, and alignment, between parties to ensure a scheme’s run-on objectives are joined-up. Once a collaborative framework is in place, and key stakeholders have been considered, a successful run-on strategy is ever more likely.”
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