Corporate sponsors could face "significant" costs if they don’t consider their risk appetite before engaging with insurers as they plan a buyout and wind up of their defined benefit (DB) pension scheme, Hymans Robertson has warned in its latest paper.

The analysis showed that a £500m scheme could lose over £10m if a plan is not implemented due to project delays and increasing costs.

This loss could also be caused by schemes losing out on potential surplus – with the risk remaining even once the scheme has terminated.

The firm said that before engaging with insurers, the risk appetite must be “fully understood” and meet the needs of both trustees and sponsors.

Understanding these risks, such as surplus, timing, member experience, and residual risk approach, would also influence what actions corporates can take to reduce risk at all stages.

A recent webinar by Hymans Robertson also found that over half of all respondents (55.9 per cent) did not believe that their scheme had a clear strategy for managing residual risks post-buy-out, and over a fifth (21 per cent) hadn’t considered a residual risk as part of their endgame journey.

This highlighted the significant gap between long-term risk and endgame planning, potentially exposing the sponsor to risks that are reputationally damaging but also have long-lasting and significant financial consequences, the firm added.

Hymans Robertson partner, Jo Gyte, said if a buyout is the scheme’s chosen endgame, it was “imperative” that a plan be put in place as early as possible to avoid spiralling costs further down the line.

“Upfront alignment and clarity will set the right path from the outset and facilitate timely decision-making along the way,” she continued, adding that a “concerted effort” to consider the key drivers of risk should be a central theme of the endgame planning process.

“Taking the time to factor these in upfront, from both the trustee and corporate position, will avoid potential issues arising later. At a basic level, this will allow a smoother journey from status quo to buyout, but it will also ensure all stakeholders are comfortable with the outcome achieved,” Gyte concluded.

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