The Pensions Regulator (TPR) has published guidance for trustees and employers of defined benefit (DB) and DB/defined contribution (DC) hybrid schemes on long-term objectives and ongoing scheme management.

The guidance is designed to help improve financial outcomes, governance, and member security and follows recent government announcements on DB surplus flexibilities as well as reflecting stronger funding levels and a growing range of endgame options.

TPR noted that improved scheme funding and emerging solutions offer trustees more strategic choices, some of which may support endgame planning.

In a blog post shared alongside the guidance, TPR interim director of policy and public affairs, Patrick Coyne, said that in the past, trustees and employers have considered insuring benefits as the end goal of their scheme, acknowledging that it is "still a good option for many".

However, he emphasised that insurer buyout is not the only option for trustees to consider.

"Not every option will be right, or even available, for every scheme. Trustees need to really think about the specific circumstances of their scheme and their members," he added.

"That is why we’ve produced new guidance for trustees and employers, to help them consider the range of new models and options available."

The guidance covers a wide spectrum of endgame strategies such as run-on to buyout and alternatives such as superfunds and capital-backed solutions as well as governance models and sole trusteeship in the endgame context.

The guidance also encourages trustees to regularly review how best to deliver members' benefits and revise their approach in light of changing scheme, market, or economic circumstances, or when better-value options arise.

"It’s critical that trustees take advice and undertake an appropriate level of due diligence, think about the different risks and opportunities, and document the steps taken when making any decisions," Coyne added.

Coyne also said that TPR "will be engaging more" on surplus with its regulated community and industry once it has "further visibility of the proposed legislation".

However, TPR said that the guidance does not aim to be a comprehensive list of all options available, “given the vibrant and ongoing market innovation”.

“There is no one-size-fits-all and it is important that scheme-specific circumstances are considered,” TPR said.

Instead, the regulator explained that the guidance should help trustees and employers engage with advisers and have better informed discussions around the range of options that might be available to its scheme.

As a minimum, TPR set out that they expect trustees to seek appropriate and proportionate professional advice, assess the impact of the option(s) on the strength of the covenant to the scheme and understand the extent to which any option(s) entail(s) some loss of trustee control and take appropriate advice to ensure compliance with its fiduciary duties.

Additionally, the regulator expects trustees to manage any conflicts of interest appropriately, carry out a full risk assessment of the option(s) that are more suitable for its scheme and how these can be mitigated, stress test fully the preferred option(s) and understand, if and how, any arrangement entered into could be unwound and the potential implications of doing so.

LCP partner and head of endgame innovation, Jonathan Griffith, called TPR’s guidance “timely” and “welcome”, noting that the regulator is “encouraging trustees and sponsors to properly consider what is right for them, their scheme, and the members rather than risk going down a route that may not meet objectives”.
 
Griffith emphasised that “there has never been so much choice and flexibility in DB endgame planning” given recent innovation and policy development.

"The guidance on running on a pension scheme is especially timely in light of the government policy announcements relating to DB surplus, and there the baton now passes to trustees and sponsors to plan for the anticipated new rules and guidance," he said.

“Whilst we have implemented many run-on and surplus-sharing agreements to date under current guidelines, we expect to see even more focus in this area under the government’s new proposals.”

However, whilst he acknowledged that this is “clearly a good thing”, he warned that there are growing considerations for trustees and sponsors when reviewing endgame strategy.

And further detail on the legislation itself is also needed, as Arc Pensions Law technical director, Ian Wright, said although there was "nothing radical" in the guidance, there are developments still pending, leaving some uncertainty.

"Trustees and employers should find the latest guidance helpful in approaching the new obligation to develop long-term journey plans, but frankly the detailed legislation around surplus will be key to understanding how to move forwards," he said. "Everyone can now feel understandably slightly betwixt and between."

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