Companies can cut the cash costs of their DB pension scheme by up to 30 per cent if they implement an effective endgame strategy instead of following the herd and heading down the TPR Fast Track route, according to the latest modelling by Hymans Robertson.

The analysis from the leading pensions and financial services consultancy suggests that, if a company is able to pledge security to adopt a corporate focussed (bespoke) approach, they could reduce best estimate cash costs by up to 30 per cent compared to following expected Fast Track requirements. Schemes taking this bespoke option would, additionally, have more time to recover from any funding shocks.

The modelling also shows that this approach could save as much as 65 per cent, when compared to a route that might be followed by the trustees if the company does not properly engage with the endgame discussion. The responsibility is on the company to work with their trustees to ensure all options are explored.

Commenting on how the modelling highlights the need for clear and strategic DB endgame planning, Leonard Bowman, Head of Corporate DB Endgame Strategy, Hymans Robertson, says:

“The majority of DB pension schemes are reaching the endgame – the final stages of their journey. But with an array of decisions to be made it is vital that they plan strategically and carefully and seek expert help in these final stages. If the company wants to intelligently manage its pension costs and risks over the lifetime of the scheme, then simply having a long-term funding objective is not enough. A holistic strategy and associated governance framework needs to be planned and put in place, as the long-term funding objective is only one piece of many in the DB endgame jigsaw.

“Our modelling sought to find out the costs of schemes taking different paths along this journey and stark differences can be seen. With cash cost reductions of around 30%-65% it is clear that taking the wrong path, making a poor choice and failing to execute these final stages in the best way could lead to significant extra cost.

“Companies need to look carefully at the value that offering security can bring. If this means a move away from Fast Track becomes feasible, then by providing the trustees with greater long term comfort, in a way that is not just linked to the company covenant, our modelling shows the significant economic value that can be generated for corporates. Improved security can support longer recovery plans. It can also prevent any short-term fluctuations that a scheme experiences from disrupting long term funding and investment strategies.

“By seeking expert guidance as they face these momentous decisions about the DB endgame strategy, companies can ensure that nothing gets missed. Having an understanding of all the options available and making sure they have all been considered will mean that these cost savings are maximised. It is important that the right ‘customised’ endgame strategy is developed to meet each company’s specific objectives. Just as importantly, the company must execute the strategy effectively, to ensure it remains on track and that future opportunities are taken as they emerge.

“By seeking advice and expertise from advisers like us, who have understanding and experience on the full range of risk transfer solutions including insurance, superfunds and capital backed solutions, companies can ensure they make the right strategic choices.”