7 Things trustees should know about DB endgame risks and strategies

Insights from Just’s recent webinar on the hidden dangers of running on

With more DB schemes in surplus than ever before, endgame conversations are not going away. Trustees face a growing menu of but with choice comes complexity. At a recent Just Defined Benefits webinar, we explored the evolving risks facing schemes and what trustees must understand before making long-term decisions. Needless to say, it’s about more than just asset risk and regulation. Here are 7 brief takeaways.

1. Risk doesn’t disappear – it just shifts around

Improved funding levels have given schemes real options. But that doesn’t mean the risk is gone. As our Head of Commercial, Rob Mechem, put it, “What looks stable today can shift overnight.” The risks, and the impact on funding positions, are constantly evolving.

Asset, investment and longevity risk, as well as regulatory risk are always front of mind. Add data risk – in respect of both security and quality – sponsor risk and the ongoing (and unknown) impact of administrative costs and it’s clear it’s a complex matrix that Trustees must navigate. Ultimately, scheme resilience is the key consideration.

2. Asset risk is very real - just ask 2022

From COVID to the LDI crisis, we’ve seen how quickly “low-risk” strategies can unravel. Even well-hedged portfolios aren’t immune to liquidity crunches or black swan events. Trustees must stress-test resilience across a range of economic scenarios.

3. Small schemes are more likely to struggle with managing longevity risk

Medical advances mean that we are living longer. A good thing by any measure. But changing life expectancy models require strategies to ensure benefits continue to be paid. Longevity hedging solutions tend to be less accessible to smaller schemes, which is a notable long-term risk to their ability to ensure members consistently receive all their benefits, throughout their lifetime.

4. Data is never perfect

Most schemes believe their data is pretty good. In reality, it’s seldom quite as good as they hope. There’s almost always work to be done such as for benefit tranching, GMP equalisation and contingent spousal benefits. Poor data can delay processes and increase costs. Similarly, cyber risk and ensuring data protection can add both risks and costs.

5. The insurance industry is highly secure

With an inviolate mandate to protect member benefits, the insurance industry is well capitalised and highly regulated, with stress testing requirements beyond other sectors. Capital ratios are broadly 200% across the market – in other words we’re holding twice as much capital as our regulators require to meet a 1 in 200 shock event. In addition, insurers are highly focused on risk management and oversight – it’s our core business.

6. Scalability brings benefits beyond security

With billions of assets under management and hundreds of thousands of members, insurers can scale to offer not just security in respect of member benefits but also improved member experience and better quality of service. From third party administrators for whom insurers are their largest, and most important, clients to the ability to offer additional benefits or regulated financial advice, insurers can and do leverage our size.

7. Supporting the UK economy has different facets

With the government being clear that UK pension assets should be used to support the growth of the UK economy, insurers are playing an important role with significant capital invested in productive assets including infrastructure projects, corporate bonds, private placements, wind farms and more. That’s on top of the benefit to UK companies who are removing the risk of a defined benefit pension scheme from their balance sheets and can extract surplus at the point of buy-out for reinvestment.

Listen on for the full presentation

This is just a brief summary of what was discussed. Listen back for the full story – including that Ross’s mum is one of our members and Rob’s insistence that his age means he’s seen it all! For any trustee or sponsor considering their DB endgame solution, we’re always happy to talk.