The game has changed: Rethinking DB endgame strategy

I recently had the pleasure of joining the panel at WTW’s DB Investment Conference to discuss “Reconsidering Endgames in the Face of New Flexibilities and Opportunities.” It was a timely and stimulating conversation, and one that left me energised by just how fundamentally the DB endgame landscape has shifted.

The decisions facing trustees today are genuinely more complex than they have ever been. I would argue they are also more interesting.
Below are some of the themes explored on the day, and the questions I believe every scheme should be asking now.

It’s no longer run on versus buy out

For many years, DB endgame strategy was framed as a binary choice: run on, or buy out. That framing is now outdated. The range of credible options has expanded, and continues to evolve.

Superfunds now offer a compelling consolidation alternative. Five schemes have already transferred to Clara, more superfunds are expected to enter the market over the next year, and a permanent regulatory regime is now in place. Authorised superfunds are subject to rigorous due diligence by The Pensions Regulator, which has helped strengthen trustee confidence in this route.

We are also seeing corporate transactions re shape pension outcomes. The Aberdeen / Stagecoach deal is a recent example of how sponsor swaps can move schemes into a more favourable ownership context, potentially improving outcomes for all stakeholders. At the same time, insurers are exploring value share structures that go beyond traditional bulk annuities.

Each of these options has a distinct profile in terms of benefit security, member experience, governance and sponsor involvement. As a result, endgame planning can, and should, start with a broader conversation about objectives for all stakeholders, alongside the primary goal of securing member benefits.

When working with trustee boards and sponsors, we now have the opportunity to think more creatively. Governance arrangements, covenant strength and scheme rules remain critical, but so too do questions about whether outcomes can be improved for members and sponsors alike. And where a perfect solution doesn’t yet exist, perhaps a new one can be designed.

Surplus: the opportunity is real, but the detail matters

Surplus sharing is not new, but the current environment, characterised by a high number of closed schemes now in surplus, changes the dynamics materially.

Proposed legislative changes enabling surplus distribution to employers while a scheme remains ongoing are, in my view, genuinely exciting for the DB landscape. Done well, surplus sharing can be a win for members and a win for sponsors, and a catalyst for stronger, more collaborative trustee - sponsor relationships.

That said, trustees need to proceed carefully. Scheme rules often restrict surplus return, sometimes even on wind up, and for many schemes the anticipated 2027 legislation will be a prerequisite. I currently chair a scheme where surplus sharing would be compelling for both members and sponsor, but the existing rules prevent it. Even so, that has not stopped us having constructive discussions about a future surplus framework and factoring this into wider strategic decisions.

Any surplus distribution framework must sit within a robust risk management structure. Trustees need clarity on what a worst case scenario looks like and the ability to act decisively if run on ceases to be viable. Buy out may be the ultimate backstop for many schemes, but trustees should not overlook superfund consolidation, currently accessible at around 90 - 95% funding on a solvency basis, as a credible alternative to plan for.

How should surplus be used?

The panel debate raised an important question: is it ever reasonable for surplus to be returned entirely to the sponsor?

The answer will always be scheme specific, but several principles emerged:

• Where a scheme includes a DC section, trustees owe duties to those members as well. Using DB surplus to cover or enhance DC employer contributions is often legally straightforward and can improve member outcomes across the trust.
• Sharing surplus between members and sponsor can make the framework easier for trustees to support, as it delivers visible benefits for members alongside any employer distribution.
• That said, full return to the sponsor may be appropriate in some cases, for example, where the surplus reflects significant historic deficit funding, where members are non contributory, or where surplus sharing arrangements were agreed previously.

As so often in pensions, the devil is in the detail. Covenant strength, contingency planning, funding headroom and the absolute size of the surplus all matter enormously. Open and honest dialogue with sponsors, supported by strong professional advice, is essential.

What does success look like?

The closing question to the panel was what success in the DB landscape might look like in a few years’ time.

For me, success means trustees actively engaging with the full range of endgame options available to them; surplus being used purposefully within sound governance frameworks; and member and sponsor interests being carefully and transparently balanced.

The world trustees operate in today is undoubtedly more complex than it was five years ago—but it is also more interesting, and potentially more rewarding.
The game has changed. The question now is how well we play it.

Lynne Rawcliffe is Head of Law Debenture’s Endgame Solutions Working Group and a professional trustee with extensive experience advising DB pension schemes on endgame strategy, covenant assessment and governance.