The most important decision you are yet to make regarding your DB pension scheme?

DB pensions can be time-consuming, complex and costly to run. Pension schemes that do not have a clear long-term plan could be missing out on opportunities to fully remove risk or release cash for the benefit of sponsors and members. Access to the insurance market has improved for schemes of all sizes, but there is more to do. Operational consolidation guarantees access for schemes of all sizes.

If you were to ask a finance leader to name the biggest decision they have yet to make, it would inevitably solicit a wide range of responses. On top of the traditional tasks of the finance function – and all the challenges they present – CFOs and FDs are also mandated to operate with strategic oversight across the entire business. Against this backdrop, a small to medium sized DB pension scheme that’s not raising any red flags might struggle to get on the agenda.

And it’s not hard to see why. “Traditionally FDs would worry about the pension scheme because there was a significant financial risk associated with them,” explains Ed Wilson, Partner and Head of DB Consolidation at Isio. “But for many pension schemes that’s no longer the case. Their better funding position means that they have dropped off the priority list at the very time that opportunity is calling.”

Knowing your options

At a fundamental level, options for DB schemes are to run them on or buy-out with an insurer. Buy-out, or risk settlement, is likely to be high on the agenda for many smaller schemes. Indeed, according to Wilson, “for the majority of smaller schemes, the question is not ‘if’ but ‘when’ they pursue a risk settlement transaction.” Ultimately every scheme except the very largest will move to insurance at some point. As schemes reduce in size, expenses become a greater proportion of the assets, so sponsors will be drawn towards solutions that remove financial and administrative burdens. At the same time, trustees will be aligned as this provides members with the greatest security for their pension.

This is playing out in practice, in 2024 there were a record 299 risk settlement transactions. It’s not just corporate demand that is shaping the market dynamics, the supply side is also changing. The addition of new insurers has created more competition for deals and while large transactions often command the most attention, small and medium-sized schemes have also benefited, albeit not to the same extent.

“It is great that more insurers are entering the market bringing greater capacity for smaller schemes, however there must be a continued drive for efficiency. We cannot sit on our laurels; the smaller end of the market needs to be more efficient to give access to schemes of all sizes” says Karen Gainsford, Risk Settlement Partner. “Smaller schemes need lower cost and greater certainty.”

The Purposeful Run On (PRO) alternative

Despite the potential benefits, pursuing a risk settlement outcome might not be the right route at the current time for every scheme. In fact, over recent years, the Government has taken steps to make it more attractive to run schemes for longer, not least the recent announcement relaxing the rules on accessing surplus. With many schemes now being very well funded, some might favour purposeful run on (PRO) over the medium term to release money back out of the pension scheme.

Crucially, there needs to be a meaningful share for both members and sponsors that incentivises both trustees and sponsors to agree to run on over the medium term after buy-out is first affordable. PRO will be most attractive for larger schemes, but even for the most efficiently run schemes there will be a tipping point where the benefits don’t outweigh the costs, Wilson says this is “around the £100m mark”.

Operational Consolidation – for an efficient journey

Whatever the destination, you should travel there efficiently. Operational consolidation means that schemes benefit from lower overheads whilst running-on and a collective buying power when the time is right to buy-out, says Wilson. “Schemes with efficient governance and an expert trustee are best placed to achieve great outcomes. For small to medium sized schemes, operational consolidation – through Isio’s Enplan or Master Plan solutions – are unique to give guaranteed access to, and reduce the cost of approaching the insurance market.”

Choosing your lane

Every scheme is unique but one generalisation is allowable: many may not be aware of the true extent of the opportunities now available to them. Whilst inaction can be the default option, it is unlikely to yield the best outcome.

“For FDs and CFOs of smaller schemes, the opportunity to access the insurance market has improved and that should act as a catalyst to make a decision on the right future for your scheme,” says Gainsford. “Getting the endgame clarified will actually give finance leaders the bandwidth to then turn their attention to the many other decisions they need to think about.”

For Wilson it all comes down to having a plan. “It’s not about thinking that there’s a single answer,” he says. “No one size fits all. It’s rather that ploughing on with business as usual could mean you, as the sponsor, are left with all the risk but without any reward.”

To find out how Isio can help map out the options for your DB scheme, speak to our experts today.