New models and options in defined benefit pensions schemes

Guidance for trustees and employers of defined benefit (DB) and hybrid schemes covering running on the scheme and different financial, governance and insurance options and the issues and considerations when using these solutions. Some of these options may form part of endgame planning. A series of case studies are also provided to aid decision-making.

Published: 3 June 2025

Introduction

As funding levels improve for schemes, and new solutions emerge in the market, there are options for trustees to consider when planning how to reach the long-term objective of their scheme. Some of these options may form part of their endgame planning.

This guidance is for trustees of DB schemes and DB and defined contribution (DC) hybrid schemes. It provides an overview of arrangements that may be available to you as a trustee if you are looking to improve financial outcomes, scheme governance and security for members. It highlights the key characteristics of these arrangements and the issues you may want to consider when assessing if they are right for your scheme.

You should regularly review the best way to deliver members’ promised benefits. It may be appropriate to change your chosen or planned arrangement in response to a change in your scheme’s circumstances, the wider market, economic factors or where new, more appropriate and/or better value for money solutions become available.

Please note, this 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. This guidance should help you engage with your advisers and have better informed discussions around the range of options that might be available to your scheme. While we cannot provide advice for your scheme on any of these options, through our market oversight and supervisory engagement we are open to proactive dialogue.

For all the options highlighted in this guidance, we expect trustees at the very least to:

• seek appropriate and proportionate professional advice
• assess the impact of the option(s) on the strength of the covenant to the scheme
• understand the extent to which any option(s) entail(s) some loss of trustee control and take appropriate advice to ensure compliance with your fiduciary duties
• manage any conflicts of interest appropriately
• carry out a full risk assessment of the option(s) that are more suitable for your scheme and how these can be mitigated
• stress test fully the preferred option(s)
• understand, if and how, any arrangement entered into could be unwound and the potential implications of doing so

Overview

Traditionally, trustees have considered insuring benefits as the end goal of their scheme. However, recent improvements in schemes’ funding levels and support from regulatory developments mean more options are now available. We have also been clear that as a regulator we do not consider insurer buy-out to be the only option for trustees to consider.

Recent market innovation has led to a wider range of financial, governance, and insurance options. It is important that trustees make the right decision for the specific circumstances of their schemes and their members. This guidance highlights a range of issues you should consider when approaching these arrangements. We encourage you to keep up to date with developments in this market, as future propositions may offer a more suitable option for your scheme.

This guidance can be useful as you explore endgame options for your scheme. Typically, endgame options will range from:

• achieving self-sufficiency (where the scheme is fully funded on the low dependency funding basis and no further employer contributions are expected under reasonably foreseeable circumstances)
• running on the scheme
• transferring to a consolidator such as a superfund
• insuring benefits with an insurance company via buy-ins and buy-outs

Not all options will be available to all schemes. Some options may only be available to schemes of a certain size, maturity, or funding level. Other arrangements offer different levels of financial, governance and member security support, so it is important to determine which arrangements may meet your scheme’s needs. Some arrangements may be used in combination.

If you and your scheme employer engage with emerging solutions at an early stage of development, we encourage you to check that your providers have approached us in the first instance and have gone through a regulatory assessment.

Your role as a trustee

This guidance does not alter or displace any standard duties of a trustee, including any duties to provide information to us and to seek appropriate professional (including legal) advice. Some of these arrangements are complicated, and/or novel, so you should consider carefully and keep under review the appropriate advice you may need to take.

To act consistently with the terms of your trust, we would expect you to consider all relevant factors when comparing options. These factors may include, but are not limited to:

• the risk/reward and/or cost/benefit of potentially appropriate options against one another and against the status quo
• member service and experience
• liquidity and approach to cashflow management, as operational failures are a risk even in well-funded scenarios
• any potential conflicts of interest or duty, or the alignment of interests between capital backers, advisers, professional trustees and the outcome for members
• relevant environmental, social and governance (ESG) factors
• any change in covenant support due to the arrangement
• the lifetime of the option and how risk may develop and be managed over its lifetime
• considering whether a failure of the solution would have recourse to employers or trustees and what protections would be in place for members if there was such a failure
• whether it is possible to exit the arrangement without incurring excessive costs or charges, if you feel a more suitable option is available for your scheme

When considering any arrangements, you should be aware of the following.

• As a trustee, you should act consistently with the terms of your trust and work collaboratively with the scheme employer. For example, the employer may want to understand the accounting treatment of any other options within their financial disclosures.
• You should ensure that any decision-making that affects the scheme and its members is considered independently from the employer’s views, albeit there may be a duty to consult with the employer in some circumstances. Any conflicts (which may include undue pressure from the employer to enter into an arrangement) should be appropriately documented and managed.
• In considering these arrangements, it is important to set out and understand your scheme’s strategic aims. Having a clear idea of the objectives and priorities for your scheme, along with an understanding of the trust deed and rules, may help you assess which arrangements are most appropriate. Doing this may help you to discount any arrangements that are not an appropriate option and/or provide a basis for negotiation, if you engage with any providers. The quality of your data may limit the range of options you may be able to consider at this point in time. Making a plan to address data issues may enable you at access a wider range of options in the future.
• When considering any arrangement for your scheme, you should undertake an appropriate level of due diligence, and document the steps taken when making any decisions. This will ensure there is an audit trail of the rationale for any decisions taken. It is important that, in addition to the costs involved, you consider the timelines and duration of any arrangement and the potential loss of control they may entail.
• Making decisions on these arrangements is likely to involve specific technical knowledge, so you should understand your role as a trustee and assess the level of knowledge you have on your trustee board and take appropriate specialist advice.
• You should consider the extent to which conflicts of interest could be present in the implementation (or not) of other arrangements and how they should be identified and managed.
• You should also consider the extent to which new models may introduce new types of conflicts of interest. For example, between advisers and professional trustees.
• As part of the terms of the arrangement, you should consider entry and exit requirements, and stress-testing arrangements under different scenarios to better understand the range of potential outcomes.
• Not all these arrangements will suit all schemes, but you should understand the characteristics of the arrangement you are getting into, the reasons for doing so and the risks involved.
• You should understand your ability to amend the terms of the arrangement over its duration. For example, as your requirements from the arrangement change. Where the terms of the arrangement permit, you should keep the costs of the arrangement under regular review to ensure they remain appropriate for what the arrangement is expected to deliver for your scheme.

Running on the scheme

Running on the scheme entails paying the benefits as they fall due until all liabilities have been discharged and/or the remaining liabilities are transferred to an alternative provider.

Continuing to run on the scheme may remain the preferred strategy or an interim strategy to achieve a certain goal at a later date, such as buy-in or buy-out with an insurer.

Read our buy-out section for more information.

There are potential benefits from running on the scheme. These include:

• increasing the potential to provide additional discretionary benefits to members or having; control over member experience (including member option terms)
• using surplus to fund the employer’s DC payments for other members
• paying surplus to the employer

Running on after being fully funded on a buy-out basis should be a conscious decision and you should be comfortable that members are likely to benefit from doing so. The main reasons to run on include the following.

• Members may be able to benefit from higher pensions if run-on is well-managed, outweighing the associated risk of running on.
• Paying discretionary benefits to members, in particular where benefit indexation is not linked to inflation (or is limited), to ensure members retain a pension in real terms.
• Retaining control over benefit option terms and continuing to offer other benefit options that may not be offered through insurance.
• Allowing illiquid assets to run off without incurring haircuts on their valuations.
• Enabling an insurance risk transfer transaction to be implemented in the future on a more competitive basis; for example, when the membership has matured and the risk profile of the scheme’s liabilities has stabilised.

Some issues to consider

Important factors to consider may include the following.

• The level of expertise on your board and your understanding of how to run on the scheme in light of the changing nature of risks for maturing schemes.
• Taking legal advice on the terms of the trust and the ability of the trustees to run on the scheme.
• Where using surplus to fund the employer’s DC payments, ensuring there is adequate skills, knowledge and understanding to ensure the DC scheme is also well governed.
• Whether the scheme’s funding position and/or employer covenant are sufficiently strong to face potential risks materialising, such as future underperformance or employer distress.
• The impact on the scheme’s funding position of a range of stress tests. This could also include consideration of the impact of tail risk events.
• Whether you could negotiate additional support from the employer to protect against any future drop in funding level.
• Entering into a framework agreement with the sponsoring employer to set out the terms under which the scheme will continue to run on, including the terms over which the scheme will run on and any ‘break’ provisions.
• Whether the scheme has sufficient scale to deliver economies of scale for the period the scheme is expected to run on, as the scheme matures and member benefits are paid out. You should consider the extent to which the scheme will continue to have sufficient asset scale to be able to operate efficiently as the scheme loses scale. You should also consider the implications on your investment arrangements of a future exit point (or series of exit points).
• The ability to manage costs and deliver value for money – in general and when managing multiple advisers – and whether you have a detailed understanding of the adviser/provider costs incurred and can demonstrate they are competitive, offer value for money and compensate for the risk being run.
• How trustee succession and key replacements will be managed over the likely term of the run-off.
• Whether you have appropriate governance rights to be able to wind up the scheme, rather than run it on, if this is beneficial for members and consistent with the terms of your trust.
• Whether there are specific areas of concern in your scheme (for example, in relation to governance, trustee experience, data issues or security) and whether some of the other arrangements available may be able to better manage/rectify those concerns.
• The balance of power in the scheme rules and who makes different decisions. Read our conflicts of interest code of practice module for further information on managing conflicts.
• Whether the buy-out market (or a superfund) is likely to be more or less competitive in the future and whether running on may allow the scheme to mature and secure a buy-out (or transact with a superfund if they meet onboarding requirements) at a lower cost further into the future.

Some issues to consider in respect of surplus.

• If surplus is generated by running on the scheme (for example, because of better investment performance), you and the employer will need to consider how and when any surplus could be paid to the employer and/or shared with scheme members. There are specific rules regarding taxation of surplus paid to the employer, so you and your employer may want to take specialist advice.
• As a trustee, you should consider carefully what the rules of your scheme say about the potential use of any surplus that will be generated. If you have no such rules, or they are unclear, it would be beneficial to take advice and put policies/agreements in place setting out how any surplus would be distributed and the conditions that would apply before surplus could be released.
• Current legislation stipulates that a scheme with an ongoing sponsor need to have passed a resolution by 2016 and be at a buy-out level of funding in order for surplus to be released.
• While we have to be notified once a surplus payment is made, if you are considering releasing surplus, we will be available if you have further questions. This does not replace your duty to take appropriate advice.
• The government has responded to the 2024 Consultation on Options for DB schemes and expressed its intention to legislate in the upcoming Pension Schemes Bill and subsequent regulations to amend the rules on surplus extraction. 
• The legislation is expected to include:
  • provision to allow trustees to modify their scheme to allow for payment of surplus to the employer, where they do not currently have this power
  • a new test for permitted surplus payments based on a low dependency funding basis with certification by the scheme actuary. The government response further indicates that the government will amend section 37 of the Pensions Act 1995 to clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries
• Once this legislation is enacted, TPR will consult and publish guidance on further considerations and factors that trustees may want to take into account when releasing surplus. Until the new provisions in relation to surplus payments are commenced, current rules will continue to apply.
• In advance of the legislation being enacted, trustees and employers may want to start thinking about how they could generate additional surplus and release it under the new proposals. We set out below some initial considerations, but these will need to be reviewed once the final legislation is in place, and you may want to take specific advice.
• Work collaboratively with your scheme sponsor: as a trustee you will have to agree to the release. We expect you to work collaboratively with your scheme sponsor. At the same time, we would expect scheme sponsors not to put trustees under any undue pressure including, for example, aiming to replace trustee board members with the sole aim of the new trustee board being able to agree a release.
• Develop a policy on surplus extraction for your schemes: we consider it would be good governance practice to have a policy on surplus extraction appropriate to the context of your individual scheme. This should include details of how members and the employer are likely to benefit from the release.
• Establish your risk tolerance for surplus extraction: allowing for the individual circumstance of your scheme and sponsor, you will need to set a funding level above which you believe surplus can be extracted. For example, this may be at a margin above the low dependency basis funding level, if regulations permit. Subject to this and any other relevant consideration, you may want to release surplus from the scheme, for the benefit of members and the sponsor in one lump sum or in a series of lump sums over a period of time.
• A scheme being materially overfunded, for a long period of time, with no plan to distribute excess funding to members or the sponsor, may not be in the best interests of members or the sponsor and may indicate poor governance controls. In line with the new DB funding code requirements, you will need to develop a statement of strategy and submit that along with the actuarial valuation for your scheme to us. As part of the valuation, you will also need to set a long-term strategy and long-term objective for your scheme. This outlines the way in which you intend the scheme benefits to be provided over the long term. Although there is no formal requirement to prepare a statement of strategy, until you are preparing your first valuation under the new funding code, we believe it is good governance practice for all trustees to set their scheme’s long-term objective and, for closed schemes, consider the endgame strategy(ies) that they expect to follow for their scheme. As part of that long-term objective, you should also set out your approach to surplus extraction for your scheme.
• If you decide that you wish to extract surplus, the level at which you consider that surplus can be extracted is a matter for you as a trustee to decide. Current legislation only allows surplus release in relation to buy-out funding levels. Any changes to this basis will be set out in future legislation. Subject to this, in situations in which the scheme is likely to remain fully funded on a low dependency basis and there is no realistic risk of employer insolvency, it is unlikely that TPR would have reservations about the release, subject to you having considered any other relevant matter related to the circumstances of the scheme and the sponsoring employer.
• Read our case study on a scheme that intends to run on.

Alternative arrangements summary

The following sections provide an outline of each type of alternative arrangement that we have considered. They are classified under governance, financial and insurance. Arrangements classified under the governance and financial categories may not be entirely independent and there may be some overlap. Given that this is an emerging market, this list cannot be exhaustive and may be updated when necessary. As follows is a short summary of the arrangements discussed later in this document.

Governance

Fiduciary management

This arrangement involves delegating some of the investment decision-making and some or all of its implementation to investment (fiduciary) managers and/or consultants to access a level of expertise that your board may not have. The arrangement should be able to improve the efficiency of investment implementation, including through access to more sophisticated investment options, economies of scale, and responsiveness, and achieve scheme objectives more effectively. However, it could also introduce additional complexity and/or cost.

Read more about fiduciary management.

Accredited professional trustees

An accredited professional trustee includes any person, incorporated or not, who acts as a trustee of the scheme in the course of the business of being a trustee. Someone will normally be considered an accredited professional trustee if they have represented themselves to one or more unrelated schemes as having expertise in trustee matters generally and they are accredited under an industry accreditation regime. Your scheme may benefit from the experience of an accredited professional trustee through improved governance and operational efficiencies.

Read more about accredited professional trustees.

Accredited sole trustees

Under this arrangement, an accredited sole trustee will replace an existing trustee board. An accredited sole trustee is a company with accredited professional trustees that typically acts as a trustee across multiple boards and are usually appointed by the employer.

Read more about accredited sole trustees.

DB master trusts and DB multi trusts

DB master trusts and DB multi trusts are arrangements that are intended to be used by different employers that are not connected with each other. Both types of arrangements aim to provide access to governance improvements, increased investment opportunities, greater investment efficiencies and responsiveness due to economies of scale and efficiencies in administration and investment.

DB master trusts are not currently subject to any formal authorisation requirements. However, some DB master trusts have elected to self-certify under the framework developed by an industry working group, led by the Department for Work and Pensions (DWP). Completed self-certificates are hosted on the Pensions and Lifetime Savings Association’s (PLSA) website.

Visit the DB master trust self-certificate page on the PLSA website

Read more about DB master trusts and DB multi trusts.

Financial

Capital-backed arrangements (also known as capital-backed journey plans)

They maintain a link with the employer while reducing reliance on it, as a third party provides capital support to the scheme.

These arrangements may be appropriate for schemes looking to achieve a particular objective. This could include objectives such as buy-out funding level after a specified period of time, or downside protection while the scheme runs on to generate a surplus which is shared, in part, with the capital provider, and typically involves changing the investment strategy and potentially some of the investment governance arrangements for the scheme.

Read more about capital backed arrangements.

Superfunds

They allow schemes to transfer to them and typically allow the employer covenant to be replaced with a financial covenant. Please see our guidance for DB superfunds and superfunds guidance for ceding trustees and employers for more detailed information.

Read more about superfunds.

Insurance

Longevity insurance (also known as longevity swaps)

This is an asset owned by the pension scheme, which insures longevity risk for a proportion of liabilities (typically pensioners, although they can also include deferred members) and they may be suitable for schemes looking to reduce longevity risk but wanting to retain assets to maintain flexibility of investment strategy. It usually requires minimum pensioner liabilities of £500 million.

This arrangement is not limited by funding level and the sponsoring employer link is retained. It may also involve establishing a captive insurance entity.

Read more about longevity insurance.

Buy-in 

This is a partial bulk annuity purchase from an insurer, which is held as a scheme asset and matches a subset of liabilities (often pensioners, but can also include deferred members) or, potentially, all liabilities pending a full buy-out transaction.

Read more about Buy-in.

Buy-out

This is a fully insured solution for liabilities of all scheme members and involves a full risk transfer for the employer (the scheme will eventually wind up after transfer), subject to them putting in place appropriate cover and indemnities for certain residual risk.

Read more about Buy-out.

Governance

We expect all schemes to be well run and well governed. Governance solutions may be appropriate where you want to improve the day-to-day management of the scheme and for making the management of the scheme more efficient. This may be achieved through:

• adding skills to the trustee board
• delegating investment decisions to consultants or investment managers
• outsourcing administrative duties
• or entering a DB master trust or DB multi trust arrangement

Fiduciary management

We expect all members to benefit from more sophisticated investment governance and risk management practices. Where trustee boards feel they do not have the expertise to provide this they may consider fiduciary management.

Fiduciary management involves delegating some of the investment decision-making and some or all of its implementation to investment (fiduciary) managers and/or consultants. Trustees remain in control of the overall strategic goals of the scheme, but by outsourcing to investment (fiduciary) managers and/or consultants for certain aspects, you may be able to improve the efficiency of investment implementation. For example, through economies of scale or responsiveness, and potentially be able to achieve your scheme objectives more effectively.

A fiduciary manager may be able to respond to investment and de-risking opportunities more efficiently by circumventing the need to wait for trustees to take advice, convene and agree on a specific investment action or set of investment actions. Additionally, they may provide access to investment opportunities previously inaccessible to trustees and/or be able to negotiate better investment management fees for certain investment opportunities. The fiduciary management service itself will have a cost. The overall cost versus benefit of this approach will need to be assessed on an individual scheme basis and on an ongoing basis as the scheme and the requirements for the investment strategy develop.

A variation of this type of arrangement is an outsourced Chief Investment Officer (OCIO) appointment. This is a more flexible form of fiduciary management which involves outsourcing the scheme’s investment decision-making to an investment manager while retaining the ability to input into some investment decisions. It can provide additional flexibility in respect of those aspects of the investment decision-making you choose to outsource. As with fiduciary management arrangements, these solutions may help to improve the efficiency of investment implementation, improve internal governance structures and reduce operational costs.

Some issues to consider

One of the key issues with fiduciary management is the ceding of control of the investment arrangements and operations to a third party. This can result in conflicts of interest in how the portfolio is managed and implemented, in line with the fiduciary manager’s products and services.

You should consider how appointing fiduciary managers interacts with your duties as a trustee and the degree of control you may be giving away as part of such an arrangement. As a trustee, you are legally obliged to run a tendering process when appointing fiduciary managers in relation to 20% or more of scheme assets in aggregate, unless exempt. You should also consider how you will oversee your fiduciary manager, particularly when they have control over your investments. You are required to set objectives for your investment consultants. Read guidance on how to tender and set objectives for investment service providers.

Accredited professional trustees

Trustees are usually appointed by the employer and/or scheme members and were historically lay rather than professional trustees. However, it may be possible under the scheme rules to appoint an accredited professional trustee. While the power to appoint trustees may not sit with trustees, as a trustee you should be aware of this option. In this section ’you‘ refers to the employer.

Not all professional trustees are accredited, but we expect that only accredited professional trustees would be considered for appointment. We would also expect professional trustees to be able to demonstrate how they achieved and maintain their accredited status.

Broadly, there are two approaches to the appointment of a professional trustee:

• replacing or adding an additional trustee, ie an additional accredited professional trustee is appointed to your existing trustee board
• replacing the trustee board, ie an accredited trustee company replaces the whole trustee board

Both arrangements charge a fee for the service and because of this, we expect accredited professional trustees to achieve certain standards. For each type, you should consider whether the costs are appropriate for the service that will be delivered and the additional benefits that will be gained.

Read our Professional pension trustee standards page.

The overall aim of these types of arrangements is to improve the governance of the scheme by bringing specialist trustee knowledge and experience that may not be available on the current trustee board. This may lead to improved management and increased efficiency of the scheme’s arrangements. They may also be an option where there is a lack of willing and suitable lay trustees available to join the trustee board.

The potential benefits of appointing professional trustees should not be viewed in isolation and employers should consider other potential issues such as conflicts of interest, relationship management with other trustees and the employer and handover issues where the whole board is replaced.

The power to appoint a trustee will be set out in the governing documentation for your scheme. In many cases, the power will sit with the employer and so implementing one of these arrangements will be particularly dependent on appropriate communication and collaboration between the trustees and the employer.

Equality, diversity and inclusion (EDI) forms an important part of the decisions made by trustees, our EDI guidance specifically covers those considerations when appointing accredited professional trustees.

Adding an accredited professional trustee to your board

This may be an appropriate solution where trustees and employers are generally happy with their governance arrangements but feel they could benefit from specific skills or experience. For example, they may need to deal with challenges arising from a weak covenant, complex financial or investment situations, or the pursuit of specific goals such as getting the scheme ready for buy-out. Professional trustees may be appointed on a long-term basis, or for a temporary period to support specific projects. Professional trustees will often be appointed as the chair of the trustee board.

Some issues to consider

In addition to having the right skills, you should consider whether that trustee will:

• have any conflicts of interest, and if so, how they will be documented and managed
• dedicate the appropriate amount of time to your scheme considering their other appointments
• work effectively with other members of your trustee board, your advisers and service providers
• represent any impact on the trustee board and members of your scheme
• have an appropriate relationship with the scheme employer

Once in place, you should conduct regular reviews of the accredited professional trustee to ensure you are comfortable with the arrangement.

Accredited sole professional trustee

An accredited sole trustee is a company designed to bring in expertise to run a DB pension scheme. You may wish to consider this option if continuation of the trustee board is no longer possible. This may be because the existing trustees do not have the skills required to govern the scheme effectively or it has not been possible to recruit new trustees. This option may also be appropriate if there is a desire to streamline governance structures or gain access to particular skills or experience.

Some issues to consider

The accredited sole trustee should be able to demonstrate independence, and there should be clear processes in place to deal with conflicts of interest. You should also ensure that a robust process is in place so that a peer review is undertaken for material decisions. Where the sole trustee is represented by one individual, you should understand what the alternate contact arrangements are and how the alternate contact is kept fully up to date.

There is a range of accredited sole trustee providers and their offerings and costs differ. It is worth considering carefully what is needed by your scheme and comparing your requirements with what is offered by the arrangement. As a matter of good practice, you should run a formal tendering process. Once in place, the employer should conduct regular reviews of the sole trustee service and consider ongoing retendering after a set period.

It is important to think about what a transition to this arrangement looks like (for example, whether the accredited sole trustee will immediately replace the current trustee board or whether there will be a phased transition). You should consider how to transfer scheme-specific data and historical information to the accredited sole trustee to ensure you do not lose scheme-specific knowledge that current and former trustees have/had. You will be required to provide certain data to the appointed accredited sole trustee entity. It will be important for you to plan for this process.

An accredited sole trustee may in some ways be more distant from the scheme membership, as it removes the requirement for member nominated trustees. You should consider how the sole trustee will maintain and enhance channels of communication with members of the scheme.

The Association of Professional Pension Trustees (APPT) released a Code of Practice for Professional Corporate Sole Trustees (PCSTs) of pension schemes.  We expect only accredited sole trustees that adhere to the code to be appointed.

DB master trusts and DB multi trusts

DB master trust is a term that has been adopted widely in the industry for UK occupational DB  pension schemes that offer to accept transfers of the DB pension assets and liabilities of non-associated employers. Conversely, DC master trusts are defined and governed by statute. This definition and statute do not apply to DB master trusts.

DB master trusts and DB multi trusts are arrangements that are intended to be used by different employers that are not connected with each other:

• DB master trusts are occupational pension schemes that an existing pension scheme can transfer assets and liabilities into
• DB multi trusts maintain the original pension scheme trust and then apply an overarching management or structure for service provision that is common to the participating schemes

Both arrangements aim to provide access to governance improvements, increased investment opportunities, greater investment efficiencies and responsiveness. They may also be able to use their size to deliver economies of scale, for example, in administration or in adviser costs.

There can be two different types of DB master trust.

• Commingled DB master trust: this is effectively one consolidated fund with one board of trustees and where transferring scheme members are all in one single section.
• Sectionalised DB master trust: different participating employer schemes are allocated to different sections within the master trust.

A DB multi trust arrangement has some similarities to a sectionalised DB master trust, but each employer’s original scheme is retained. Different DB multi trust arrangements might either retain each scheme’s original trustee board or include a replacement trustee board/sole trustee.

To enter a DB master trust, the scheme rules must allow for a bulk transfer without members’ consent. When the schemes transfer in, the employer link is retained, and the employer remains responsible for funding their scheme’s liabilities.

Conversely, entry into a DB multi trust does not require a bulk transfer of members, but still the employer link is retained, and the employer remains responsible for funding their scheme’s liabilities. If the scheme needs to exit the arrangement in the future, a DB multi trust arrangement is generally easier to exit, as there is no need for a bulk transfer of members and an individual trustee board is already in place.

DB master trusts: some issues to consider

Some DB master trusts have one set of trustees managing either one single commingled structure or different sections from participating employers. Where this is the case, there may be some disconnection from the original employer. It is important to be comfortable with the communication processes between the DB master trust’s trustees, the employer and members.

In a sectionalised DB master trust, your members may gain from being able to have their benefits bought out when their section reaches the appropriate funding levels, compared to those in a fully commingled master trust.

Generally, commingled DB master trusts are less common, are mainly used for smaller schemes, and typically require stricter covenant quality tests to be applied to individual scheme employers that want to participate in the arrangement. This is to reduce the risk to the other employers within the commingled arrangement and to avoid the risk that the insolvency of one employer will affect the members of other schemes within the arrangements. Similar considerations can apply when a sectionalised DB master trust groups participating employers within a limited number of sections, rather than in individual sections. Consequently, before entering any DB master trust arrangement, it is important to understand what would happen upon the insolvency of one of the existing (or future) participating employers in the arrangement. This is to ensure your members’ benefits are protected and they are not exposed to additional risk by entering the arrangement.

Whichever type of DB master trust you are considering, you should consider the balance of powers between the DB master trust provider, the trustee board of the DB master trust (and, where it is retained, the trustee board of the individual scheme) and the participating employer. You should also consider whether the benefits and efficiencies you may be gaining on entering the arrangement sufficiently compensate for any loss of control.

DWP have developed a DB master trust self-certification scheme which is maintained on the PLSA website. Review of this self-certification may form a part of (or starting point for) due diligence on the arrangement. However, a single review would not be a substitute for an appropriate level of due diligence and advice before entering any arrangement.

DB multi trust: some issues to consider

If you are considering a DB multi trust, you should consider the following points:

• whether the DB multi trust trustee and/or their advisers have the capacity to service your scheme
• where the trustee governance model is changing, then the same considerations for accredited professional trustees would apply
• the effort and cost of moving into a DB multi trust versus the future services available in the DB multi trust and the costs
• the processes involved in joining and leaving the DB multi trust

Finally, if a DB multi trust is considered to be the most suitable option, you should ensure you review the arrangement regularly to determine whether it is delivering better outcomes for your scheme.

Financial arrangements

These may be useful if you are looking to take advantage of investment and risk management opportunities, to help you deal with specific risks or to improve the chances of achieving a particular goal for your scheme. These arrangements usually aim to provide increased returns for the scheme to achieve an objective over a defined timeframe, such as to reach buy-out funding or a low dependency portfolio stage within five to seven years.

One example of an alternative financial arrangement is a capital-backed arrangement, also known as a capital-backed journey plan. Generally, for these arrangements the employer link is retained. Another financial arrangement is a superfund, which entails the transfer of the scheme and, typically, the replacement of the scheme’s employer covenant.

Capital-backed arrangements

Capital-backed arrangements entail a commercial contract where third-party capital supports the delivery of a range of expected outcomes for the scheme at the end of an agreed period. The capital supports additional investment risk being taken and the arrangement generates returns for the investor.

This capital is typically provided to the scheme, conditional on the scheme’s assets being invested in a higher-returning portfolio for an agreed period. Depending on the contractual agreement between scheme and provider, the provider may aim to take any excess capital above the agreed target at the end of the term as a return to investors. Alternatively, they may choose to release excess capital on an ongoing basis throughout the duration of the agreement. In some arrangements, there may be the possibility of members being able to share in outperformance by way of discretionary increases.

In the event of specified underperformance, the capital provider will release funds to the scheme to restore the funding level of the scheme to a specified level. These types of arrangements can be customised to meet the specific goals or needs of your scheme. This includes increasing the likelihood of members receiving full benefits or specified end goals (for example, buy-out) within a set period of time.

Some issues to consider

Although these arrangements are primarily financially-focused, trustees should be mindful of any implications for the governance structure of the scheme, and the extent to which any roles and responsibilities are altered or remain unchanged; particularly their own.

Capital-backed arrangements may be able to reduce employer reliance or provide further access to higher risk/return investment opportunities. These arrangements typically involve changing the investment strategy and potentially some of the investment governance arrangements for the scheme. You should take appropriate advice to understand the level of risk the arrangement entails and to ensure you are comfortable with the possible loss of control over the investment strategy during the lifetime of the arrangement.

Where there are additional fees/charges for services provided, you should consider whether these are reasonable. You should be aware there may be penalties for any subsequent changes to your agreement, for example, due to a reduction in employer contributions, or an early exit from the arrangement. You should consider the risk and affordability of incurring any such penalties and take appropriate advice.

Capital-backed arrangements typically mandate a particular investment strategy and how it is  implemented. You must consider whether the potential influence of the provider or funder of the arrangement is compatible with your fiduciary duties and commitment to your scheme.

Read further guidance about DB investment.

Allowing for the investment strategy proposed as part of the arrangement, you should consider the following factors.

• The types of investments, including their risk profiles.
• The level – or lack – of investment flexibility. The terms of the arrangement may dictate which advisers to use, which investments are available, or the period over which certain investments will be held. You must be comfortable as a trustee with any reduced level of control.
• The overall level of risk that can be taken under the strategy. You must be comfortable with the balance between the new level of risk and the additional capital.
• Different arrangements may use the capital to absorb a different array of risks, for example, investment risk only or other scheme risks such as longevity, member options and expenses. You will need to understand the extent of any risks covered by the capital support provided. The amount of the capital support provided should be appropriate for the level of risk being taken.
• The scheme’s exposure to ‘losses’ above the level of any capital support provided.
• The recourse/accessibility of any capital provided (for example, whether the capital can be used by the provider for other purposes/schemes and whether it remains available to your scheme should the capital provider become insolvent).
• Exit fees and costs for leaving early from the arrangement.
• The contractual implications of an employer insolvency on the capital-backed arrangement. This could include consideration of the unwind options, both for where you want to exit the arrangement on pre-agreed terms or where you want to continue the arrangement, if this is in accordance with the terms of the trust, and it meets the capital expectations under 7.3 in our superfunds guidance.

If you are considering a capital-backed arrangement for your scheme, the Institute and Faculty of Actuaries (IFoA) has published a paper with further details and considerations for entering capital-backed arrangements.

Capital-backed arrangements may also be put in place to replace an employer, allowing the scheme to be run on with a special purpose vehicle employer. They may also be put in place ahead of an employer insolvency or after an insolvency occurs to enable the scheme to run on. There are specific considerations for these situations which can be found in the following guidance:

• DB superfunds guidance
• guidance for trustees and employers considering transferring to a DB superfund

Additionally schemes can approach us to discuss directly via supervision engagements.

Superfunds

The DWP published a response on 17 July 2023 to its 2018 consultation on superfunds, laying out its intent to create a future legislative framework in the upcoming Pension Schemes Bill 2025. Since 2020, in the absence of a legislative framework for superfunds, we have operated an assessment regime with interim guidance.

• Read our guidance for those setting up superfunds.
• Read our guidance for ceding trustees and employers.

DB superfunds are DB scheme consolidators.  They enhance the security of member benefits, through providing additional capital and delivering improved efficiencies, economies of scale, and better governance.

There are currently two types of superfunds emerging in the marketplace.

• A ’bridge to buy-out’ superfund involves the transferring scheme effectively becoming a section of the superfund until it reaches the stage at which it can buy out with an insurer.
• A ‘run-off’ model is a superfund that accepts assets and liabilities from transferring schemes with the intention of providing all future benefits directly from the superfund (run on indefinitely).
• Superfunds may be suitable for schemes where:
  • there are employer covenant issues
  • the employer is looking to achieve a clean break from the scheme
  • buy-out of full benefits is not available
  • the scheme is in Pension Protection Fund (PPF) assessment, but is expected to leave assessment as their funding exceeds PPF benefit levels

Some issues to consider

It is important that in a superfund transaction you work collaboratively with the sponsoring employer and that you are informed about all the stages of the process. You should read our guidance for ceding trustees and employers to understand the different stages of a transfer, which currently include obtaining clearance from TPR, and our expectations for trustees.

Superfunds are expected to provide a very high probability of members receiving full benefits. Superfunds are intended only for schemes that can meet specific gateway principles, as set out in our guidance for ceding trustees and employers. It is important that you are confident that your scheme meets certain conditions to enter a superfund and you can provide a clear rationale for your decision to transfer.

Unlike the arrangements discussed so far, when a scheme transfers into a superfund the employer link will typically (but not always) be severed and the employer and trustees may discharge all their duties on transfer. Within this context, transferring to a superfund may be appropriate if you have concerns about the ongoing covenant support from your employer and the scheme is in a situation to meet certain conditions for transfer. It will then be up to you and your sponsoring employer to decide what type of superfund may be more appropriate for your scheme.

Insurance solutions

Buy-ins and buy-outs are the most well-known options that offer trustees the opportunity to insure members’ benefits. The market is continually evolving and variations of these are starting to come to market, which include an element of surplus sharing between the employer and members. For these transactions, specialist advice may be particularly important.

Insurance solutions are typically difficult to exit. Trustees should carefully consider the implications of entering into such arrangements. The market continues to innovate and, as elsewhere in this document, we do not intend this overview of insurance options to be exhaustive.

Current funding levels of schemes and the readiness of trustees to consider an insurance transaction will impact the availability of options to transact in the insurance market. For future transactions, insurance market capacity to transact should be considered carefully, as this will have a bearing on market pricing for insurance transactions versus alternative risk transfer solutions coming to market.

Longevity insurance (also known as longevity swaps)

Longevity insurance is a policy designed to protect the pension scheme against the risk that members live longer than expected. Typically, existing pensioner members are covered but deferred members can also be covered. It will not eliminate other risks such as inflation and/or interest rate risks. Unlike buy-ins, they do not require a large portion of the scheme’s assets to be transferred to an insurer.

In return for regular premium payments, the insurer agrees to pay the benefits set out in the policy for the members covered until they die, along with any death benefits, such as dependants’ pensions.

If a member lives longer than expected, the insurer bears the cost. If the member has a shorter life than expected the insurer profits. Longevity insurance may be advantageous for schemes that are looking to retain assets, as there is unlikely to be any upfront lump sum payment as insurance premiums are usually collected monthly.

Some issues to consider

Providers have traditionally favoured larger schemes because they have more mortality data for their scheme. There may be providers who are willing to consider smaller schemes, but this will depend on capacity in the market.

These instruments typically have no premium to pay up-front but will incur charges over time and commonly require collateral to be posted at outset or very early into the contract.

You should consider the nature of the charges and the implications that collateral requirements may have on your scheme’s general liquidity, particularly its ability to meet other collateral/margin calls (for example, where leveraged LDI portfolios are held). You should consider the contract provisions regarding policy surrender or transfer/renovation to a third party in future, as longevity swaps are usually impossible or impractical to sell.

Buy-ins

A buy-in is a form of partial risk transfer which can help secure benefits in the scheme. In exchange for a portion of the scheme assets and a premium, the insurer agrees to pay an income to the scheme to cover the insured members’ benefits. The trustees remain legally responsible for paying the member. The policy becomes an asset of the scheme and it covers the investment, inflation and longevity risk for the members covered under the policy.

Historically, buy-ins only covered pensioners. Buy-ins are now also available for deferred members, but the premium required to secure benefits for these members is generally more expensive due to more uncertainty about future liabilities.

For some schemes, a buy-in could be an interim step if the ultimate goal is buy-out. Full buy-in transactions can be the first step to a full buy-out and winding up of the scheme. A scheme can also complete multiple buy-in tranches over time and may partner with an insurer to reach the end goal of full scheme buy-out.

Some issues to consider

Depending on the potential size of your transaction, you may find that some parts of the insurance risk transfer market are less competitive. Schemes of any size may be able to access a buy-in, but schemes of certain size and liability characteristics may be able to obtain more competitive pricing. Whatever the size of your transaction, having advisers who are familiar with insurance risk transfer and the current state of the market should help you to transfer your liabilities effectively and efficiently.

Buy-ins generally limit flexibility by reducing the amount of liquid assets held in the scheme. This reduces the scale of assets available to the trustees, can reduce some economies of scale and can reduce the level of assets on which they can generate an expected (and sometimes higher) return. You will need to consider how a buy-in affects the level of liquidity you have within your scheme and also how it may reduce the level of total return you may be able to generate from your scheme’s assets.

You will also need to consider whether the benefits outweigh the risks/costs of completing a buy-in. While buy-ins are generally considered to reduce risk, they reduce the pool of typically liquid assets that the trustees might otherwise hold against the liabilities transferred.  You should understand the impact of a buy-in on your scheme’s liquidity management and, in particular, how the transfer of assets to an insurer as part of a buy-in transaction can reduce the pool of liquid assets the scheme can access to meet liquidity calls, particularly due to collateral/margin calls (for example, where leveraged LDI portfolios are held).

You should also consider the potential issues with having buy-ins across different providers when they reach the point of buy-out in the future. You should also consider member security, benefits, and administration, which will need to be assessed at that point.

You need to consider how residual risks will be addressed as part of the transfer. For example, residual risks could arise from data issues, resulting in insuring incorrect benefits or beneficiaries having been erroneously left out of the data. You should take appropriate advice as to whether an additional premium should be paid to enable an ‘all risks’ transfer (if available) to be made or whether the scheme or employer should retain the risks. You should also consider the extent to which indemnities are required.

Read Pensions Association Standards (PASA) guidance on Data readiness for buy-ins and buyouts.

Communication is important to ensure the employer understands the terms of the buy-out and any accounting implications of it.

Buy-ins may affect the provision of discretionary benefits. You should be aware of the potential for this to happen and you should seek professional advice as to whether this potential loss would be outweighed by the extra certainty of payment. You should also consider how member options, such as cash commutation and transfer terms, might be affected by the terms of the risk transfer.

Buy-outs

A buy-out is a complete risk transfer (subject to certain residual risks) where, in return for receiving a premium, an insurer becomes directly responsible for paying members’ pensions. The trustees can then wind up the scheme and sever the link with the employer.

For many years, in the absence of other credible market options, a buy-out had generally been the endgame for many trustees and their scheme employers and this led to the development of an established market and specialist advisory practices. A scheme of any size can access buy-out as long as they are sufficiently funded, but schemes of certain size and liability characteristics may be able to obtain more competitive pricing.

The cost of this arrangement can be prohibitive for some schemes, as the buy-out premium you pay will reflect the insurer’s charge for insuring (almost) all the risk and their profit margin.

You may need to pay more to secure your scheme’s benefits fully with an insurer than might be assumed necessary to run on. The additional premium provides the benefit of full risk transfer subject to some residual risks remaining.

Some issues to consider

Firstly, you should consider whether a buy-out is right for your scheme. It may be helpful to consider the benefits of a buy-out versus the other options available.

As with buy-ins, you should take specialist advice, possibly considering appointing an accredited professional trustee or risk transfer specialist to support you. An accredited professional trustee might also bring some insight on winding up the scheme after buy-out.

Among other issues, advice could help you to understand your exposure to any residual risks following a buy-out, as well as suggesting solutions (for example, insurance) to mitigate that risk. Advice can also help you to run an efficient process, address data cleansing, set out benefit specifications and re-position the scheme’s investments to be better aligned with insurance pricing.

Having the right knowledge and advice should make the process simpler for you and may allow you to engage with insurers on a more competitive basis. The better prepared your scheme is, the more likely you are to get engagement and competitive pricing when you run the risk transfer process.

While some bulk annuity providers may favour larger transactions, this is not always the case. Some insurers may have dedicated solutions focused on smaller schemes, and a range of market solutions have been developed by a number of advisory firms to improve access to the insurance risk transfer market for smaller schemes.

There may be ways that you can make your scheme more attractive when preparing for a buy-out, and indeed transfer to other models like superfunds. For example, ‘clean’ data and clarity around rules and benefits are helpful to insurers as it allows them to understand your scheme better.

Consider the information the insurer would like, in what format and your ability to provide it. PASA has published updated guidance on data cleansing for buy in and buy out readiness which may also be useful to read.

Communication is important to ensure the employer understands the terms of the buy-out and the accounting implications of it. Members should be informed that the insurer is taking responsibility to pay for their benefits.

As with buy-ins, trustees should consider the potential loss of the ability to provide discretionary benefits against the extra certainty of benefit payment. You should also consider how member options, such as cash commutation and transfer terms, might be affected by the terms of the risk transfer.

Case studies

This section provides some cases studies of situations that could take place involving some of the arrangements outlined in this guidance. They propose a number of questions we would expect trustees to ask themselves when considering options. These are not exhaustive. The case studies are purely illustrative and should not be construed as advice. For all the scenarios listed below, we would expect the trustees to take appropriate independent advice when looking at the available options.

Superfund or capital-backed arrangement

The scheme is closed to accruals and new members, has approximately £500 million of assets under management (AUM) and is around 88% funded to buyout level. The trustees are very engaged and meet regularly, and the long-term objective is to achieve buy-out. However, the employer covenant has weakened and there are talks of a potential sale or merger with an external third party. The employer would be willing to pay a special contribution to the scheme to remove it from the balance sheet.

A first set of questions trustees should explore in this scenario include:

• Does the trustee board have the relevant skills and expertise on the range of endgame options to make decisions that could have a significant impact on members?
• Would the appointment of an accredited professional trustee help the trustee board to achieve a better outcome?

In this scenario, after considering their knowledge and expertise, the trustees decide that they have the right skills on the board to consider the options available and conclude that a capital-backed arrangement or a superfund could be appropriate solutions to consider to help them achieve their longer-term goal of buying out. The trustees review these options and acknowledge that:

• A capital-backed arrangement would allow the existing trustee board to enter into an agreement with external investors over a set period and enable the trustees to buy out the scheme and remove it from the employer’s balance sheet by the end of the set period (for example, 7 to10 years). Alternatively, a transfer to a superfund would enable the employer to remove the scheme from its balance sheet once the transfer had completed, which would remove a potential barrier to a sale or merger of the business. However, the employer would need to pay a premium to do so.

Under this option, some questions that trustees should consider include the following:

• How long will they be locked into this arrangement?
• What degree of control will they be relinquishing?
• What exit mechanisms are available?
• Have they read TPR’s DB Superfund guidance for ceding employers and trustees for capital-backed arrangements (CBAs)?

If trustees go for a superfund some questions to consider are:

• How familiar are the trustees TPR’s DB Superfund guidance for ceding employers and trustees?
• How confident are they that they will be able to work collaboratively with the employer throughout the process of transferring into a superfund?
• Have they considered how likely the scheme is to meet the conditions to transfer to a superfund set out in the DB superfund guidance?
• How confident are they that the employer will be able to afford the upfront cost of transacting with a superfund?

Fiduciary manager, accredited professional trustee or accredited sole trustee

The scheme is closed to new members but still has accruals from existing members. There are approximately £100 million of AUM. However, funding levels have dropped to close to 70% of buy-out levels as the scheme’s investment strategy did not perform in line with the trustees’ expectation. The trustees are also locked into costly servicing agreements. The employer covenant is relatively strong, but there are talks of a corporate restructure and redundancies that may affect the employer’s cashflow and ability to top up the pension scheme in the future. The trustees acknowledge the underperformance may not have been helped by gaps in some of their knowledge and understanding.  Given the low funding level, the insurance market or DB consolidators are unlikely to be feasible options for them to consider.

In this scenario our Choose an investment governance model guidance may be useful to help the trustees determine how to identify and bridge the gaps. Furthermore, the trustees could consider governance arrangements which could deliver economies of scale when investing their assets, improve investment and risk management implementation and help to improve the funding position of the scheme more quickly than if they had stayed with the status quo. One way of doing this is to go down the fiduciary management route. Our existing Tender for fiduciary management services guidance on tendering for a fiduciary manager provides further details on how to appoint a fiduciary manager.

If they decide they want to appoint a fiduciary manager, some questions trustees should consider, include the following:

• What will be the degree of control over the investment strategy that they will be ceding to the fiduciary manager?
• How will conflicts of interests be managed?
• How will they oversee the fiduciary manager?

The employer could also consider whether the appointment of an accredited professional trustee to the trustee board would provide them with additional expertise and enable them to improve their overall management of the scheme. Some questions that the employer should explore under this option include the following:

• How will conflicts of interests that may arise be dealt with?
• Will the appointed trustee be able to work collaboratively with the rest of the board, advisers and the service providers?
• How will the appointment benefit the trustee board?

If the trustee board struggles to make decisions or has issues with retaining and/or succession planning of trustees, then a sole trustee could be another option to consider. This would mean  the existing trustee board would be replaced with an accredited sole trustee company. In this case, the employer should consider at least the following when looking at this option:

• How will they ensure  the sole trustee demonstrates independence from the employer?
• How will conflicts of interest be managed?
• How will the transition from the current board to the new sole trustee company be managed so that scheme specific knowledge is shared and retained?

DB master trust or DB multi trust

The scheme is open to new and existing members and has approximately £50 million of assets under management. The employer covenant is strong and the employer is happy to continue to support the scheme . The trustees are finding it difficult to negotiate cost-effective investment and administration provision due to the size of the scheme.

There could be a couple of potential options for the scheme. One is that the trustees could consider a DB multi trust arrangement. This would keep the scheme’s legal framework unchanged but have the added advantage of enabling the trustees to access wider investment platforms and administration efficiencies. As the existing legal framework remains intact, it would also be straightforward to unwind this arrangement. This would give the trustees some additional flexibility if it was considered appropriate to pursue other options at a later date, particularly if the scheme arrangements changed, it closed to accruals for new entrants and existing members, and it started to mature.

Under this option, some questions that trustees should consider include the following:

• Do the trustees really understand the benefits they are going to get from transferring into the DB multi-trust?
• Are there specific risks related to the structure of the DB multi-trust for example, conflicts, use of internal pooled funds, key person risk, how they invest the assets?
• Will the benefits compensate for the additional costs?
• Will there be any exit fees?
• Will it involve the appointment of new trustees? Read our accredited Professional Trustees Guidance. If so, then trustees may consider the same set of question related to appointing accredited professional trustees.

An alternative option could be for the scheme to join a sectionalised DB master trust. The mechanism for this would be a bulk transfer of assets and liabilities from the scheme into the DB master trust. The scheme may then be able to take advantage of lower costs in administration and investment. Joining a scheme with other unconnected employers participating in the same overall trust means that the efficiencies available could be greater. Some questions trustees should explore when considering this option include the following:

• How are the scheme members’ benefits protected from the risk of other employers participating in the arrangement?
• What would happen upon the insolvency of one of the existing (or future) participating employers?
• Will the benefits compensate for the additional costs?
• Will there be any exit fees?

If the scheme closes to accruals, under both options, it could offer an additional opportunity for buy-out, as the DB multi trust and DB master trust would be able to bundle a number of schemes together to obtain quotes from a provider, which could make the scheme more attractive to buy-out providers. This is likely to be cheaper for the employer than if the scheme continued as it was and approached an insurer on its own.

Insurance: longevity insurance or buy-in

The scheme is closed to all accruals and is approximately 90% funded to buy-out levels. AUM are approximately £1 billion and it has more pensioners than deferred members. The trustees are concerned that members are living longer than expected, which is affecting the scheme funding levels. They are looking for solutions to reduce the risks that this presents. The scheme also intends to run on so may not consider a superfund as an option at this time.

The trustees could consider a few options in this situation. If they were more concerned about the risk that pensioners were living longer than expected and therefore having to pay pensions for longer, then longevity insurance is one way of reducing this risk. In this situation, some questions they should explore include the following:

• What level of charges over time and collateral will be required by entering into this arrangement?
• What are the provisions in respect of policy surrender or transfer or novation to a third party?

Alternatively, if the trustees want to mitigate the risk relating to the size of the scheme, they may like to consider a partial buy-in arrangement with an insurer. This could target a particular cohort of the pensioners which could be most impactful on the risks related to the scheme. The trustees would then be free to manage the remaining assets in line with their long-term objective for the scheme. If they adopt this approach, some questions trustees should explore include the following:

• How will the buy-in policy affect the level of liquidity remaining within the scheme?
• How may it reduce the level of total returns that the scheme may be able to generate?

Scheme intending to run on

Multiple

Capital-backed arrangement, fiduciary management, sole trustee, multi trust and professional trustee.

Scheme objective

The employer is undertaking a wholesale review of its business, which includes the closed DB pension scheme. The employer would like the trustees to look at options available to them to run on with a possible view to generating a surplus, which can be shared with the scheme members and the employer. The existing trust deed and rules allow for the scheme to run on and pay discretionary benefits.

Scheme characteristics

The scheme is of medium scale, fairly mature, closed to new and existing members with approximately £500 million of scheme assets and around 50% of the liabilities relating to pensions in payment. The scheme is around 102% funded on a buy-out basis, although the employer does not want to consider buy-out in the foreseeable future.

To date, the trustee board has operated in a standard way, taking advice, setting the investment strategy and appointing/replacing investment managers in line with trustee decisions made following advice. The trustees have all been appointed by the employer or through member nominations and there are currently no professional trustees on the board. The trustees have recently had difficulties recruiting new trustees with the right level of expertise and are open to seeing whether they can benefit from using a different governance model, which they believe could deliver economies of scale, improved investment and risk management and better member outcomes.

The employer is comfortable to retain the pension scheme for the longer term, once the trustee board composition and the scheme’s governance model can be made more resilient. As the funding level of the scheme had increased in recent years, the trustees had reduced the level of risk in the investment strategy and had started to reduce their exposure to some long term, illiquid fund holdings.

Feasibility assessment

To determine whether run-on is an appropriate option for the scheme, the trustees decide to hold a workshop with the employer and the scheme’s advisers. As part of that workshop they consider a range of factors, including the following:

• The level of risk that could/should be run, given the potential benefits and risks to members and the employer.
• The likely scale of any surplus, the timescale over which it might be generated, and how (and when) it might be distributed to members and the employer.
• The expected timescale for run-on (including the maximum term they consider it could be appropriate to run on for, for example, before dis-economies of scale kick in). The trustees and the employer agree that it would be sensible for the objective to run-on to be subject to periodic review. Their starting assumption is to agree a 10-year time frame for run-on, with an interim review after five years, when they can make a decision to retain the original timeframe or extend by another five years. This will help to ensure run-on still aligns with their corporate goals, they can invest with less constraints (longer investment horizon) and run-on remains a viable endgame strategy. The longer investment timescale also helps to ensure the investments can be managed in a way that offers the opportunity for increased returns.
• The legal considerations around running on. Although the scheme deed and rules allow for run-on and surplus sharing, the trustees and employer want to understand the practical implications and any legal risks that might arise and need to be mitigated.

Following the workshop, the trustees and employer agree that running on to generate surplus is a feasible and worthwhile option for the scheme. The trustees and the employer agree to work together, with the scheme’s advisers, to establish a detailed proposal and a framework agreement. There are a series of steps that could be followed in this scenario, which could include the following:

Establishing rules for surplus distribution

The trustees may want to set out in an agreement with the employer how they expect surplus to be distributed which could include:

• how they anticipate the surplus payment would be spent
• when and under what circumstances surplus could be distributed
• what the governance and sign-off processes around surplus distribution would look like

Assessing risks and outcomes

The trustees ask their adviser to prepare a thorough assessment of the risks and opportunities that running on their scheme presents. This could include a number of factors, including the impact of:

• a deterioration in the employer covenant on the level of investment risk being run and on the proposals for surplus generation
• a potential takeover or merger of the employer
• a material dislocation in investment markets

The trustees could also ask their adviser to:

• undertake some scenario and/or stress-testing analysis to better understand the range of possible future outcomes
• prepare some projections to understand how the scheme’s assets, liabilities, cashflows and membership would develop during the run-on period

Improving the scheme governance

The scheme has been well-run to date, but the employer is aware that a number of the most experienced trustees are due to retire in the next few years. The employer believes that running on the scheme can produce a useful level of surplus on a regular basis but wants to ensure their scheme governance arrangements continue to operate into the future on a stable basis. The employer is aware there are a range of market options available and asks the trustees to consider a number of options including:

• entering into a capital-backed arrangement
• entering into an arrangement with a fiduciary manager or outsourced chief investment officer
• entering into a DB multi trust arrangement
• appointing a sole trustee

As part of their review of the options, the trustees decide to:

• obtain specialist advice (legal, covenant, actuarial, investment) to help them determine which option would be best for the scheme
• consider whether the existing board has the relevant skills and expertise to be able to assess these emerging models in order to determine which might be the best solution for their scheme
• consider whether appointing an accredited professional trustee to the board could help with their review and their longer-term scheme governance

Framework agreement

Finally, with support from their advisers, the trustees decide to establish a framework agreement with the employer. This ensures the expectations of employer and trustee are clear and it enables appropriate protections to be built in for both. The framework agreement includes the following:

• The objectives for running on, including the expected time period to run on.
• How the surplus will be shared between the employer and members.
• The level of investment risk that will be run.
• How the investment strategy will be implemented.
• The types of investments that could be considered and any specific investment restrictions.
• How the investment strategy is expected to develop as the scheme runs on and the liabilities mature.
• How any future changes in the investment strategy would be agreed between the trustees and the employer.
• How ‘contingent’ events would be handled.
• Their policy on liability buy-out, for example, whether the trustee could/should consider buy-in opportunities as their liabilities mature and market pricing develops.
• Their policy on longevity hedging, for example, whether trustees could/should look to mitigate longevity risk if market opportunities to do so arise.

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