Flexibility is "key" when selecting a run-on strategy for a defined benefit (DB) scheme, Hymans Robertson has said, arguing that insurance should always remain a possibility if things change.

The firm's latest ‘Excellence in Endgame’ paper addressed the "delicate balancing act" facing DB schemes, emphasising that DB schemes must have enough freedom in their run-on strategy so that insurance can always remain a possibility if things change.

The report suggested that several actions — including limiting liquidity and maintaining buyout-ready operations and member data — can help ensure that flexibility remains an option, allowing a switch to insurance, if desirable, at a future point.

The report also emphasised the need for DB schemes' run-on objectives to be reflected in their investment strategy as part of endgame planning, warning that skipping this step could increase the likelihood and risk of future underfunding.

Commenting on the factors that DB schemes must consider when aligning on their endgame, Hymans Robertson partner and head of pensions policy innovation, Calum Cooper, said: "In order for trustees and employers to define an endgame strategy for their circumstances, there are a number of competing considerations that must be worked through.

"Our paper outlines key factors to consider when defining your core asset and surplus-sharing strategy.

"For example, it's really important to define your strategy for longevity risk as the next decade will be different. Real scenarios and interactive modelling can help bring this alive and save time and effort.

"There's no perfect time to start sharing surplus. Trustees and sponsors will need to balance the needs, wants and tolerances of stakeholders, and of course, the final decision must ultimately be right for the members.

"For example, the longer you take to build reserves before distributing surplus, the higher the level of return and surplus share, which can be targeted. This opens the possibility for a wider range of asset classes – for example, illiquid assets may be a more attractive option. But it also changes who gets what.

"And finally, external considerations must not be forgotten. Changing legislation and guidance from the Department of Work and Pensions (DWP) and the Treasury may influence how you share value.

"This is not straightforward territory. But with £100bns of surplus capital in DB schemes, the scale of the positive impact on members' lives, sponsors', businesses, and the UK economy is such that the territory is worth travelling. The delicate balancing act of defining a productive and dynamic run-on investment strategy for the journey cannot be underestimated."

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