Well-funded defined benefit (DB) schemes could be missing out on millions of pounds in surplus by delaying endgame decisions, according to research by Van Lanschot Kempen Investment Management UK.

The fiduciary manager warned that trustee inertia is becoming a greater risk than market volatility and funding shortfalls for many schemes, with modelling suggesting a £1bn scheme targeting a modestly higher return, within a 'purposeful' run-on strategy, could generate an additional £35m of surplus over five years compared with a more cautious approach where endgame decisions are delayed.

The study suggested the impact of endgame delays is similar across schemes of all sizes, with a £250m scheme potentially generating an additional £9m in surplus over five years, rising to as much as £178m for a £5bn scheme.

Commenting on the findings, Van Lanschot Kempen UK investment strategist, Calum Edgar, said: “Two schemes can look similar on paper but deliver very different outcomes over time, simply because one has made a clear endgame decision and the other has not.”

He explained that, when it comes to endgame, “deciding beats drifting”, and current market conditions mean some trustees may be tempted to push decisions further down the road, but delaying is not always neutral.

He added that “asset allocation is critical to endgame outcomes” and that it is important that trustees engage actively with the choices available, rather than allowing delay to substitute for decision making.

“For many well-funded schemes, the risk today may lie less in making the wrong endgame decision, and more in failing to make one at all,” he said.

The study found that the length of delay also impacted outcomes, with the modelling suggesting that a £1bn scheme could forego £7m in surplus by delaying an endgame decision by one year, with the potential loss rising to £72m if the delay extended to 10 years.

Furthermore, Van Lanschot Kempen UK estimated that if half of UK DB schemes delayed decision making, around £40bn of potential surplus could be lost over the next decade.

Van Lanschot Kempen UK fiduciary manager, Jonathan Craddock, concluded: “Whether trustees choose to run-on, transact with an insurer or pursue an alternative solution, outcomes can be shaped less by the option itself than by the quality of the decision behind it.”

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