Explaining how companies could be unintentionally ‘sleep walking’ into buy-out, Leonard Bowman, Head of Corporate DB Endgame Strategy, Hymans Robertson, says: For most companies the right strategy will be to buy-out their scheme as soon as it’s financially feasible. Risk transfer could be achieved through the use of buy-ins, longevity swaps or, more fundamentally with an ultimate plan to buy-out benefits when affordable. Whether or not buy-out is the way to go, it should always be a conscious decision, given the scale of the financial implications.
“Given the pace of change in scheme funding that we are seeing in the industry, companies might be unintentionally ‘sleep walking’ down an endgame path that isn’t the one they intended to take. Many companies do not seem to realise they are heading towards a relatively short-term ‘de facto’ buy-out as many schemes are getting close to being able to self-fund a whole scheme buy-in.
“We’ve produced this guide to help companies understand how they can avoid this ‘sleep walking’. It aims to give them the understanding to actively decide whether they should be aiming for their DB pension scheme to target buy-out as soon as possible or opt for a longer-term run-off strategy.”
Commenting on the buy-out decisions facing corporates, Leonard continues: “Companies are increasingly facing the key question of what their view on the role of risk transfer solutions, as part of the DB endgame strategy, will be. Many have avoided addressing this question, due to the perception that it would lead to an investment and funding strategy involving higher company contributions. They are also likely to be wary of taking the risk of becoming “locked in” to a strategy that might not make sense in the future if circumstances change.
“However, as scheme funding levels continue to improve and insurer pricing remains competitive, trustees are increasingly looking at the merits of risk transfer and are therefore keen for their sponsors to articulate a clear view on the issue. There’s a danger that, if corporates don’t have an understanding of the direction they want to take and continue to sit on the fence, risk transfer solutions will be implemented by trustees with the sponsor being effectively a bystander.”
Copies of the guide can be found here.
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