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Defined benefits (DB) end-game: your questions answered

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Following the success of their webinar, Jess and Jane answer your questions on end-game options and strategies for defined benefit schemes.

Who holds the power in negotiations where trustees and employers disagree on what the end-game strategy should be?­

This will depend on the balance of powers in your rules, so will be scheme-specific. If, for example, trustees have the ability to set contribution rates or trigger wind-up of the scheme, these can be powerful levers in negotiations. It will be important to take a close look at your rules (with help from your friendly lawyers!) to make sure you know who might have the upper hand if things do get heated.

What are the merits of a series of small buy-ins vs jumping straight to full buy-out?­

Doing a series of buy-ins can be more manageable than going straight to buy-out, especially in larger, more complex schemes. Where a scheme has a range of benefit structures and categories, buy-ins can be targeted to deal with tranches of members in different stages. This means that data verification and benefit specifications can be focused on one tranche at a time, which may be more feasible than attempting to do all members at once.

We advised one of our trustee clients on a pioneering approach to buy-ins: putting in place an ‘umbrella’ agreement with insurers, setting out key commercial terms, and adding a short schedule each time they wanted a new tranche of benefits to be covered. This allowed buy-ins to be put into place quickly and efficiently (on one occasion, within 10 working days from pricing to completion), allowing our client to take advantage when good pricing became available (read more).

­Where pension funds are held in escrow or reservoir trust, what protection is in place for the employer’s cash until it is added to the scheme?­

Using an escrow account or reservoir trust means that the cash will not be put into the pension scheme unless and until the conditions for doing so (agreed between the employer and trustees) are met. This protects the cash from being trapped in the scheme and, if the conditions never arise, the funds will ultimately be returned to the employer.

Can you comment on partial buy-outs - is it possible while the scheme is ongoing?­

Yes, it is possible, but there can be some tricky legal issues to navigate. One key issue is that trustees will not benefit from a statutory discharge, which can cause concern. It may be possible to mitigate the risk here, for example through seeking an employer indemnity to protect trustees, but this is just one of many issues that needs to be thought through carefully. We’d be happy to help you explore this.

­Is there a risk that schemes become “locked in" to one end-game strategy? Most seem to want buy-out, but maybe that becomes inappropriate? Can they switch to a consolidator end-game strategy?

It can be possible to change tack but the consequences will depend on what stage you have got to, for example whether you have entered into a contract with an insurer and what the penalties for ending that contract are. The best approach is to consider your options carefully at the start of the process, with advice on all the relevant considerations to take into account, to make sure that the strategy you adopt is the right one.

From an employer perspective, if you've provided a really generous DB benefit, have made significant contributions over the years based on a very prudent TP basis and have the full right to a refund - surely the Regulator has absolutely no right to demand the surplus is used to augment already generous benefits?

That’s right, the Pensions Regulator doesn’t have the power to require surpluses to be used to augment benefits; that will be down to the scheme rules and the agreement reached between the employer and the trustees. The Regulator may, however, ask questions to ensure that scheme benefits are being protected and payments out of the scheme (if a surplus is returned to an employer) are not risking the payment of those benefits. What’s important is to have a clearly documented and well-reasoned story to tell, which explains why the action you take is reasonable and appropriate.

I missed the webinar, how can I catch up?

You can request a copy of the recording by emailing here.

To make sure you don’t miss any future seminars you can request to be added to our mailing list here.

Alternatively, get in touch with Jessica Kerslake and Jane Higgins to discuss your end-game strategy.

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