Strong sponsor covenant remains the most critical factor for those looking to run on DB schemes, with a view to releasing surplus funds.
This was the key finding of a recent poll run by Aon, at an event exploring how DB schemes decide endgame strategies.
A poll of 135 attendees found 39 per cent of respondents said that having a strong employer covenant would be the most important factor in supporting a successful run-on strategy. Meanwhile, 31 per cent felt that maintaining a scheme funding buffer would be the most important approach, and 29 per cent opted for having a robust covenant monitoring and trigger framework.
Aon says that many schemes reviewing their endgame strategy in the light of new options. This includes the opportunity for scheme sponsors to release surplus funds in the DB pension.
The event explored how understanding the strengths and weaknesses of a pension scheme’s covenant is critical in making the right choice for members and sponsors.
Aon partner Alex Beecraft says: “While a strong covenant is clearly vital to a successful run-on, in practice all these three factors form part of a safe run-on strategy.
“With the potential to release surplus presenting an exciting opportunity, the key to success is agreeing the right protections through a combination of sponsor strength, funding buffers and monitoring and contingency frameworks.
“First movers among schemes running-on have so far taken a cautious approach, but we expect trustees will become more comfortable releasing surplus once The Pensions Regulator’s guidelines are in place and market practice develops.
“It seems certain that a strong employer covenant and protections to underpin this strategy will be crucial for many trustees to feel comfortable releasing surplus. Together, these could reduce the need for a funding buffer and may allow more money to be put in the hands of members and sponsors.”
Attendees on the webinar were also asked what they regarded as the most important factor when choosing an insurance partner under a buyout strategy. The majority were focused on the financial strength of the insurer, confirming that security remains a key factor in endgame decision-making. However, over 40 percent focused instead on the member experience that an insurer could offer, pointing to an increasing importance in understanding how members can be impacted by an insurer’s approach.
Aon senior consultant in insurer due diligence Sam Matto-Willey says: “With the differing offerings available from insurers, we are seeing that non-price-related factors are having a greater impact on trustees’ choice, particularly where the existing sponsor covenant of the scheme is strong. This appears to be leading trustees to be more selective when approaching the market.
“To make the best choice for their members – and early in the endgame process – trustees need to gain an understanding of the financial strength of different insurers, the services they each provide to policyholders and – most importantly – how this compares to what their scheme currently offers.”
