What Are Endgame Solutions?

For defined benefit pension schemes, reaching the point where they can secure members’ benefits and potentially wind up can be seen as the ‘endgame’. However, finding the right path to this endgame isn’t always straightforward. While a buyout may be the ultimate goal for many schemes, it’s not the only option available. Endgame Solutions refer to a range of strategies designed to secure a scheme’s long-term objectives and ensure that member benefits are protected, whether through a full buyout, a phased approach, or other innovative methods.

Understanding Endgame Solutions

As defined benefit pension schemes mature, they typically reach a stage where it becomes essential to establish a clear plan to secure the benefits promised to members. Endgame solutions encompass a variety of approaches that aim to reduce risks, manage liabilities, and, ultimately, bring the scheme to a satisfactory conclusion. These solutions are highly tailored, taking into account the scheme’s funding level, membership profile, and the goals of both the trustees and the sponsoring employer.

Key Endgame Strategies

1. Buy-ins and Buyouts

A buy-in involves the scheme purchasing an insurance policy that matches the liabilities for a group of members, effectively transferring the investment and longevity risks for those members to an insurer. This can be a first step towards a full buyout.

A buyout occurs when the scheme purchases an insurance policy for all members, and the insurer takes on the responsibility for paying members’ benefits directly. This allows the scheme to wind up, having fully secured the members’ pensions.

2. Longevity Swaps

Longevity risk, the risk that members live longer than expected, is a significant concern for pension schemes. A longevity swap transfers this risk to a third party, typically an insurer or reinsurer. In return, the scheme pays a regular premium, reducing uncertainty over future payouts.

3. Phased and Partial Buy-ins

For schemes that are not yet ready for a full buyout, a phased or partial buy-in can be an effective strategy. This involves gradually securing benefits for different sections of the scheme as funding and market conditions allow.

4. Pension Increase Exchange (PIE) Exercises

A PIE exercise involves offering members the option to exchange future pension increases for a higher starting pension. This can be beneficial for both the member, who receives a higher immediate income, and the scheme, which reduces its future liabilities.

5. Trivial Communication Exercises

For members with small pension pots, a trivial commutation exercise offers them the option to exchange their pension for a one-off lump sum. This can simplify the administration and reduce liabilities for the scheme.

6. Capital-Backed Solutions

These involve using a capital-backed structure, such as a capital-backed journey plan, to underpin the scheme’s funding and investment strategy. This can provide additional security for members’ benefits while managing the scheme’s risk exposure.

Choosing the Right Endgame Solution

Selecting the appropriate endgame solution requires a deep understanding of the scheme’s current position and future outlook. Factors to consider include:

Funding Level: 

Is the scheme fully funded, or are there deficits that need to be addressed before pursuing certain endgame strategies?

Membership Profile: 

What is the age and life expectancy of the scheme’s members? Are there specific cohorts that could benefit from tailored strategies?

Employer Covenant: 

How strong is the financial support from the sponsoring employer? A weak covenant may necessitate a more conservative approach to de-risking and securing member benefits.

Market Conditions: 

Timing can be critical. Market conditions, such as interest rates and insurer pricing, will influence the cost and feasibility of different endgame options.

The Role of Trustees and Advisors

Endgame planning is a collaborative effort, involving trustees, the sponsoring employer, and a range of advisors. Trustees have a fiduciary duty to act in the best interests of scheme members, while also working closely with the employer to align on the best strategy for securing the scheme’s long-term objectives.

Specialist project management and independent advisory services can be invaluable in this process. They bring a focused perspective, coordinate the various stakeholders, and ensure that every aspect of the chosen strategy is carefully planned and executed.

Conclusion

Endgame solutions are about much more than simply winding up a pension scheme. They involve a strategic approach to securing the best possible outcome for members, while managing risks and liabilities effectively. Whether through buy-ins, buyouts, or other innovative methods, finding the right solution requires careful consideration, expert guidance, and a clear understanding of the scheme’s goals.

In a complex and ever-changing pensions landscape, having a well-thought-out endgame strategy is essential for any defined benefit pension scheme aiming to secure its members’ futures and bring the scheme to a satisfactory close.